*Terrorism? *
*Not quite. The plumes of smoke are all that's left of two major hedge funds which blew up just weeks ago leaving nothing behind but a few smoldering embers and a mound of black soot. *
*The compiled assets of the Bear Sterns High-Grade Structured Credit Strategies Fund--nearly $20 billion--have vanished into the miasma of cyber-space soon be joined by $1.4 trillion of other, equally worthless, Collateralized Debt Obligations (CDO).*
*If you look closely, you'll see the mangled bodies of the CDOs, the CDSs (Credit Default Swaps), the RMBS (Residential Mortgage Backed Securities) and the other shaky debt-instruments being pulled from the wreckage and tossed on the bonfire.*
*Is this how it all ends? Will the sudden spike in subprime defaults send all the funds in "Hedgistan" crashing to earth?*
*No one knows--yet.*
*According to Bloomberg News, Bear Sterns announced last week that there's "little value left" in one of its funds and "no value left" in the other.*
*Nothing, nada, zippo. *
*The news has left Wall Street in a state of shock.*
*What does it all mean?*
*Does that mean that the entire hedge fund Empire"which is built on a foundation of dodgy loans and quicksand---may be headed for the crapper?*
*We don't know. But a cloud has settled-in over downtown Manhattan where gloomy-looking men in pinstriped suits are waiting for the other shoe to drop.*
*The hedge fund industry is based on the bizarre notion that one does not have to produce anything of value to make boatloads of money. You don't even need assets any more---just a risky subprime loan that can be transformed into an investment grade security (CDO) through the magic of "securitization" a sprinkling of Wall Street snake oil.*
*Abracadabra---presto-chango!*
*It's like wrapping up broken bottle-glass and selling it as the Hope Diamond. Until Bear went under, no one really noticed. But they are paying attention now. When these toxic CDOs went to auction, no one bid for them. Now that's scary. *
*"No bids" means that $1.4 trillion in investments have no discernable market-value. The CDOs were graded "mark to model" which translates into "mark to fantasy". It means that the investment bankers and hedge fund managers simply got together over Martinis one night and pulled a number out of a hat.*
*Now no one wants to buy them. They're worthless. ------------------------------------------------------------------------------------------ *
For the rest see:
http://patrick.net/housing/contrib/hedgistan.html