after the redundant market gyrations triggered by the triple witch options expiration day ( 16.6.07), markets are turing reasonable, falling back to gravity at a moderate pace. bear stearns hedge funds problems linked to mortgage collateral securities are raising questions on the valuation techniques of these instruments and on the impact on us consumption following the spectacular liquidity driven cycle after sept 11 that has benefited us home builders. Equity markets look to be at a juncture and best guess and wisest development fron now onwards is a slow landing of indexes at lower levels ( see dax, supoport 7800, head and shoulder ?) . Yet , one point where the market is losing focus , interest rates , treasuries are hiking given the flight to quality shift from junk paper . not anymore a sufficient reason to step in , markets on the sideline waiting for the response of the fed this evening.
http://www.ft.com/cms/s/2b7e102a-2401-11dc-8ee2-000b5df10621.html
The Bear Stearns hedge fund fiasco removes the paradox. Banks’ capital is about to be slashed, and with it excess liquidity in the global system. Look at mortgage-backed collateralised debt obligations -– pools of debt assets, in which investors take stakes with different levels of risk. Suppose the CDOs held by banks were valued at “market” rather than “model” levels (a fancy new euphemism for illusionary historic book values). Their capital would turn out to be lower. Preservation of capital ratios against loans would require fewer loans: liquidity would have imploded......A bunch of hedge funds may have problems, but that is the tip of the iceberg for “Titanic” Wall Street. Who holds the toxic tranches? Answer: the originating banks and syndicating investment banks for the most part.....As these lower-rated tranches retain the bulk of the credit risk in the mortgages, their retention by such banks means the much-trumpeted shifting of credit risk off balance sheets was less than met the eye. If the higher-rate stuff is worth 85-90 per cent of face value at best, what is the value of the $750bn of mortgage-backed securities said to be held in US commercial banks’ balance sheets
