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Bear Stern Sub-Prime Hedge Fund In Trouble-Update
You're going to be reading a lot about this in the financial press if you haven't already. The short story is that Bear Sterns made some bad bets with derivitives based on sub-prime loans. The positions they took were with borrowed money and they are now facing margin calls of around $9B. Merrill Lynch is their largest creditor for these obligations and may actually seize the securities involved in order to auction them off. The problem comes from a potential ripple effect that could be caused by an auction of the seized sub-prime derivitives, since the paper will likely be deeply discounted at auction. $Billions of these sub-prime backed instruments are all over the street. If Bear's paper is seized and sold at a deep discount, everyone else's paper will get their price discounted as well, triggering more margin calls. It's basically a situation where all of a sudden-a lot of people are going to be holding paper that will be rapidly depreciating, with no ready buyers standing in line. It's also the kind of thing that could light the fuse of a panic, not so much becasue of the loss but for the possible liquidity implications. Or to put it in a funny way-The more liquidity "drys", the more the street's pants will "wet"!! Update: It appears that Merrill will be conducting the auction today.