Monday, March 24, 2008

Quick Takes: Credit Churn, Bear Stearns

The failure of auction rate securities is still causing angst for the closed end bond funds. The leveraged funds that issue auction rate preferred shares are in serious trouble.

BlackRock and others in this business are searching for strategic alternatives. Over $300 billion in securities are at risk, and BlackRock has 66 impacted bond funds with a value of $9.8 billion.

Despite proposals for re-financing and put features for these instruments, the probability of a resolution appears bleak. By the end of the auction rate failure crunch, there is an expectation that one or more of these fund families will flounder. Most likely the backing company will be sold for pennies on the dollar.

The news is not any better in the subprime sector, the delinquencies on the mortgages issued between 2005 and 2007 continue to rise according to Standard & Poors. The delinquency rate is rapidly approaching 40% for many of the notes issued in these years; the rate of delinquency is jumping 4 to 10% per month. Wall Street expected a delinquency rate of 15% worse case when it packaged the notes in CDOs; so much for financial modeling.

In other news, you don’t have to feel bad for all those executives at Bear Stearns; many of the top insiders sold large chunks of stock in December in advance of the implosion. It appears that these folks will not have to move out of their multi-million dollar mansions.

In related news that will cheer up Bear Stearns employees, JP Morgan raised its bid to purchase the bank to $10 from $2. The question being if Bear’s chairman James Cayne who is probably off-site at either a bridge tournament or the golf course has heard this news yet.