The Generational Dynamics board was definitely NOT brain dead.Higgenbotham wrote: > This may be a coming Bear Stearns or Lehman moment but it's very
> unlikely the market will recognize it as such as of yet.
> I remember when the first Bear Stearns CDO funds collapsed on July
> 17, 2007. The boards were all completely brain dead on the issue,
> and the stock market did little to nothing for 2 days. So we'll
> see.
> There will be a very small percentage of people in the world who
> will see this for what it might be as worldwide IQ plummets and we
> descend headlong into the new dark age.
** http://www.generationaldynamics.com/pg/ ... tm#e070718
Generational Dynamics Web Log for 18-Jul-07
Bear Stearns announces that its hedge funds are almost worthless.
And that was AFTER all 15 ABX indexes had already collapsed to new
lows.
The defaulting hedge funds that almost caused a broad market meltdown
a few weeks ago are now almost worthless, according to a letter that
the company sent to its investors on Tuesday afternoon.
The hedge funds are based indirectly on money earned from
collateralized debt obligations (CDOs) and other credit derivatives
based on mortgage payments made by individual homeowners across the
company. As mortgage foreclosures have surged across the nations, the
values of the CDOs have been falling, forcing the hedge funds to fall
in value.
According to a faxed copy of the letter, appearing on the Wall Street
Journal web site, one of the hedge funds has "very little value," and
the other has "effectively no value left." Here are some excerpts:
Fund managers and account executives have been informing the Funds'"Let me take this opportunity to provide you with an update on the
status of the High-Grade Structured Credit Strategies and
High-Grade Structured Credit Strategies Enhanced Leveraged Funds
managed by Bear Stearns Asset Management (BSAM). A team at BSAM
has been working diligently to calculate the 2007 month-end
performance for both May and June for the Funds. This process has
been much more time-consuming than in prior months due to
increasingly difficult market conditions.
[[Notice the names of these funds. Imagine what a Very
Important Person you'd have to be to own shares in the High-Grade
Structured Credit Strategies Enhanced Leveraged Funds. Wow! Just
mention that name to a girl and you'd have her in bed before you
reach the word "Funds." Too bad though, 'cause you're getting
screwed in other ways as well.]]
As you know, in early June, the Funds were faced with investor
redemption requests and margin calls that they were unable to
meet. The Funds sold assets in an attempt to raise liquidity, but
were unable to generate sufficient cash to meet the outstanding
margin obligations. As a result, counterparties moved to seize
collateral or otherwise terminate financing arrangements they had
with the Funds. During June, the Funds experienced significant
declines in the value of their assets resulting losses of net
asset value. The Funds' reported performance, in part, reflects
the unprecedented declines in the valuations of a number of
highly-rated (AA and AAA) securities.
investors of the significant deterioration in performance for May and
June. The preliminary estimates show there is effectively no value
left for the investors in the Enhanced Leverage Fund and very little
value left for the investors in the High-Grade Fund as of June 30,
2007. in light of these returns, we will seek an orderly wind-down of
the Funds over time. This is a difficult development for investors in
these Funds and it is certainly uncharacteristic of BSAM's overall
strong record of performance."
Separately from the letter, Reuters learned that the value of the
High-Grade fund is about 9 cents on the dollar.
This must be a disaster to the investors who had each invested
millions or tens of millions of dollars in the fund. Even after the
Bear Stearns debacle in June, investors were still hoping to get 50
cents on the dollar, but now are learning that they'll get next to
nothing. I wonder how many people learned on Tuesday that they've lost
their life savings?
News of letter came after the market closed on Tuesday, which means
that the results weren't reflected in the ABX index values for the
day.
Index price of low-quality ABX-HE-BBB- 07-1 credit derivatives and
high-quality ABX-HE-AAA 07-1 credit derivatives from Jan 19 to Jul 17,
2007 (Source: Markit.com)
There are 15 ABX indexes, representing mortgages from before 2006
(06-1), before the second half of 2006 (06-2) and before the first
half of 2007 (07-1); for each of those time periods, there are five
quality ratings from the lowest (BBB-), representing the weakest
subprime mortgages, where foreclosures are most likely, to the highest
(AAA), representing the strongest and most creditworthy mortgagees,
for a total of 15 different indexes.
By the time that the market closed on Tuesday, and before the letter
was disclosed, 14 of the 15 ABX indexes has fallen to their lowest
values ever. (The remaining one is very close to its lowest.)
Tuesday's news from Bear Stearns means that the indexes still have a
lot farther to fall.
If you look at the two graphs, you'll see what a "crash" would look
like if they were graphs of a stock market index.
Last week I described three global economic imbalances that could
trigger a major international financial crisis:
* Collapse of the credit derivatives market.
* Collapse of the Shanghai stock market bubble.
* Collapse of the Wall Street stock market bubbles.
The second and third of these situations will not happen until there's
an investor stock market panic. But the first of these is already in
progress, and is continuing to spread to other markets.
From the point of view of Generational Dynamics, a generational stock
market crash is overdue. If you go back through history, there are of
course many small or regional recessions. But since the 1600s there
have been only five major international financial crises: the 1637
Tulipomania bubble, the South Sea bubble of the 1710s-20s, the
bankruptcy of the French monarchy in the 1789, the Panic of 1857, and
the 1929 Wall Street crash. We're now overdue for the next one. It
could happen next week, next month or next year, but it will come with
absolutely certainty, and will come sooner rather than
later. (18-Jul-07)