Locked behind the Gates of Hell

More on the subprime and alt-a implosions.

Investors in Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund are not only locked in, but are getting bids of 5 cents on the dollar. The ask is a mere 11 cents. That’s what happens when you are locked behind the gates of hell.

Investors in that fund are not allowed to withdraw their money and the securities they own are now virtually worthless.

The redemption trap & Merrill Lynch Cover-Up

As the Bear Sterns funds were cratering, creditors led by Merrill Lynch wanted to force Bear Stearns to sell securities to cover the losses. The plan was halted after it became obvious the securities had dropped hugely in value. Y’see, if the market accepted a huge markdown in the value of Bear Stearns mortgage portfolios, then all the other investment banks would be forced to take similar markdowns in price. And they couldn’t allow that to happen.

“It was a cover-up,” says Charles Dumas, global strategist at Lombard Street Research. He believes the banks alone have $750bn in exposure.

Here’s why investment banks can not allow their portfolios of junk mortgages to be repriced.

As foreclosures increase, subprime securities in CDOs begin to crumble. This almost certainly leads to a ratings downgrade below investment level. If that happens, many institutions will be forced to sell the CDOs they own because they are only allowed to hold rated paper. Who will they sell to and at what price?

The amounts of money involved here are staggering in part because of speculation done via Credit Default Swaps (CDS). The notional amount (amount to pay if everyone defaulted) of CDS is at least 4 times the size of the corporate bond market with 2$ trillion in losses now projected.

In yet further signs of a collapsing market, vulture funds are selling packages of defaulted homes for pennies on the dollar and many of the miscreants and greedheads involved are now suing each other.

More than a few analysts and observers are saying what’s coming could make the dot-com bust look small by comparison.

We need an economic system that is not based of greed, where a tiny few made billions, and left a toxic mess for the rest to clean up.