Wow. News this evening that the two Bear Stearns hedge funds specializing in mortgage bonds that have been in the news as very troubled for several weeks are all but worthless.
A complete wipe out.Ã‚Â Something like 1.9 billion up in smoke.Ã‚Â As the mortgage bonds default (because people are not paying their mortgages) and lose their value in the secondary market where institutions buy and sell such bonds.
Bear (BSC) is down about five dollars in the after market on the news.
But the big worry is for the health of the entire “asset-backed securities” markets, upon which the mortgage and credit card industries are now (ie since the mid 80s) founded.
The stuff has been flying for a week, with Wall Street keeping a stiff upper lip. It’s now going to be impossible to ignore.
The failure of another large “hedge fund”, Long Term Capital, in the late 90s is something of a precedent. But the underlying cause there was bad management a few huge bad trades.
Whereas the underlying cause here, with the Bear funds, is the failure of the mortgage bonds to endure their stress. And there are zillions of them in the world. And people who can’t pay their mortgages are not likely to be paying their credit card bills or their auto loans (each of which are also packaged into bonds).
This is why Wall Street is trembling. Imagine the consequences if the mortgage and credit card businesses freeze up. We are already in pain due to the housing construction contraction.
This may make it harder for the people running Bush’s foreign policy to attack Iran.