The Wall Street Journal reported today that two Bear Stearns hedge funds with $20 billion invested in deteriorating CDOs are now on the brink of collapse.
The sudden crisis at the funds began when they recently reappraised their losses from 6.75% of assets to 18% of assets. The Journal reports, “The huge revision at least in part reflected conversations Bear Stearns hedge-fund managers had with bond dealers, three of which told them in late April that some of the funds’ assets were worth less than the values stated on the funds’ books, according to a person familiar with the matter.”
This is a worry certain prominent bond market investors have expressed for some time now: that the obscure nature of the CDO market is hiding losses in the multi-trillion dollar industry.
Auctioning off the assets of these two funds will finally give the world accurate prices for the investments they hold. This light being shone on the dim world of CDOs must scare the living s*** out of hedge fund managers. With trillions of dollars of securities out there waiting to be repriced, there are certain to be a multitude of funds facing the same fate as the Bear funds.
As this daisy chain unfolds, there are certain to be ripples in the financial markets, not the least of which is the market for mortgages. And any hiccup there would mean serious ramifications in the already injured real estate market.