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What’s up with Bear Stearns?

The WSJ:

J.P. Morgan Chase & Co., a lender to Bear’s hedge funds, was scheduled to begin an afternoon auction of collateral it held from the Bear fund, mainly mortgage-backed debt. Minutes before the sales were to begin, the firm pulled back. Later, J.P. Morgan came to terms with Bear to eliminate its exposure to Bear’s troubled hedge funds, said a person briefed on the matter. Some traders said the bank might have been forced to settle with Bear because the loans it had put up for sale would have fetched so little in the market.

[...]

Merrill also planned to sell collateral and stopped negotiating with Bear, according to a person familiar with the matter. Due to the mortgage market’s restless state, some of the early prices bandied about for Merrill’s assets were relatively low.

So Bear opened its books to the buyers. The buyers shuddered with horror.

The very good Going Private private equity blog continues:

This brings up some interesting questions: What exactly does a “reserve price” mean in a forced auction of securities made to satisfy margin calls? If, in fact, JP Morgan, was not able to meet its “reserve price” in the auction and therefore held the collateral instead what does this imply for the securities in question? How does one now mark them to market. At the reserve price? At the highest non-accepted bid?

Clearly, there is some pricing information here, but it is obviously not beneficial for any of the parties involved to let that signal leak out if it is so low that it is likely to be damaging- and this seems to be the case.

Now what? It’s screamingly obvious that the other banks also hold huge quantities of CDO’s. They want to buy up Bear’s wreckage of a portfolio off-market so that they don’t have to list their CDO’s as worth a fraction of their former value, which would hit them with margin calls and cause a lot of carnage.

But nobody’s being fooled here.

I guess everyone just runs for the doors now?

A smaller bank with minimal CDO holdings (are there any?) should buy Bear’s stuff on the open market and trigger an earthquake among the big players.

But I’m sure Bear knows it can get some money from the other banks, just to keep the pricing information off the market.

Also, I find Blackstone’s involvement in all this very interesting. Blackstone is surely already getting reamed by last week’s tightening in the bond market. They are also days away from a sexy IPO. It would be very unfortunate indeed for Blackstone to get caught up in this, and ruin such a rosy picture…

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