This article seems like a very strained attempt to make Wall Street look hypocritical. It is not very convincing.

At the end of the article it states that the Wall Street firms refused to forclose on the funds; Not true, as stated in the begining of the article ML did forclose on the funds (i.e. seized their assets).

It also states that the Wall Street firms were clamoring for a bail out. No evidence of this is provided and I have not seen anything of the sort described in the financial press.

Finally, the article says that Wall Street relented when Bear Sterns loaned the fund money. Why is this surprising? If you have a sub-prime mortgage and your rich uncle lends you money, the bank will back off.

The article seems to imply that Wall Street is unwilling to accept the financial discipline that average joe borrowers have. In fact, Bear Sterns (part of Wall Street) is paying a big price for setting up some lousy hedge funds. That is real financial discipline.

I'm astounded that a supposed "money" columnist understands so little of basic economics. What the hell did y'all do with Blodget? I want him back!

Okay, Mr. Gross, in simple terms: Bear transferred the loss from the hedge fund investors to the bank's investors. That's it. Yes, technically, it's a bailout of one set of investors by another set, but there's nothing fundamentally uncapitalist about a bank deciding to make certain investors whole. Bear investors should be extremely pissed off, but you're not addressing those poor bastards who just got shanghaied.

The one sorry aspect is that, by following the Bush doctrine (ignore bad news and hope it goes away), Bear has made things a lot tougher for the next few months. What WOULD make a pretty cool column is how many Bear funds might remain exposed and how much other funds would have written down assets in response to this hedge fund's failure. But that would require, you know, a bit of math I suppose.

Amaranth was different because it lost its money in natural gas where thousands of trades are made per day. There was no question that Amaranth was worthless given the well-known price of natural gas. But there's some real question as to the extent of the damage to the Bear Stearns funds.

Mortgage-backed CDOs trade so irregularly that nobody knows what their real value is even on a good day. But even if a rational fair price is 50 cents on the dollar, who's going to step in and be the first buyer at that price if they know that $Billions more might be on sale shortly from other blown-up hedge funds, driving the price down to 30 cents or lower. You can have a situation where there's no buyers at any price until people know how much supply is about to be dumped onto the market. Does that mean the value of CDO's is zero? Probably not. Should Wall Street's sink-or-swim ethos extend to pricing assets at artificially deflated prices too?

The banks that lent billions to the funds had an irresistible urge to be the first to sell and win the game of musical chairs even if that nearly guaranteed the absurdly low prices and disaster for everyone. Bear had the power to be the single patient lender that could allow things the time to settle down so the losses don't have to be huge. In the meantime, Bear has taken on a large risk and has a possibility of losing billions. But as one of the biggest dealers of CDOs they were acting in their best interest to keep that business alive and maybe also in protecting other exposures to CDO prices (as lender to other hedge funds and/or maybe billions in their own account).

This article has class-warfare and moral-hazard angles that I think are unwarranted. The rich investors in the hedge fund have probably lost all of their investment. The hedge-fund manager has been sidelined and is all but out of a job. Bear Stearns itself now has this albatross around its neck for the near future. (There *is* a moral hazard left in that the other banks have gotten away relatively unscathed).

If disaster had happened, interest rates would inevitably have gone up causing more foreclosures. And less credit would be available for homebuyers, particularly sub-prime borrowers. So Bear's actions *helped* homeowners.

You said "Mortgage-backed CDOs trade so irregularly that nobody knows what their real value is even on a good day." That may be true in practice because of the obvious great cost of determining the value at frequent intervals. However, it is not true in principal. The ultimate value of these CDOs must be the value of the property which is mortgaged. This is not the same as evaluating a baseball that Lou Gherig hit for a home run or a sweaty handkerchief that Elvis threw into a crowd at a concert. The value of that kind of thing is really ephemeral. What we have in the present case is just one more example of our society's tendency to complicate and elaborate until we have created monstrosities whose accounting costs outweigh their real values.

<< The ultimate value of these CDOs must be the value of the property which is mortgaged.

No, the ultimate value of these CDOs is what someone else is willing to pay for them. Besides, how much are these CDO properties worth? Once again, the properties are worth as much as someone else is willing to pay for them. Lately it seems that this amount is going down - in both the CDO market and the real estate market. In this case, how do you properly value these?

In the "broad sense", everything is worth what someone is willing to pay for them. However, in the practical real world, the value of housing can really be estimated within a few percent by many professionals who do this for a living. That is why homes for sale have advertised prices and most sales are usually close to or at those prices.

This article struck me as odd. "I," Joe Schmoe investor, don't need bailing out because I don't lever my investments NINE times, as Bear Stearns' funds did. I used to work as an RMBS trader at a hedge fund, and that is an extreme amount of leverage for securities that are thinly traded and subject to monthly mark-to-markets which are guesstimates at best. So did Bear "take one for the team?" Maybe. Or maybe, once they realized how badly their risk management appeared, they did it to mollify the strong, widely-heard criticism of what went awry at a supposedly expert debt shop. Sure, Wall Street is a tangled web, and CDOs (and CDO-squareds) further complicate the interrelationships between instruments and institutions. But Bear did this to save their own hiney first and foremost, not to spare their Wall Street brethren. It is a rare day that Wall Street is altruistic, and this is not an example of it either.

PhilfromCalifornia:

The ultimate value of these CDOs must be the value of the property which is mortgaged.

Yes, not so ephemeral as a home-run ball but still pretty ephemeral in the current market. The asset values of the CDOs are based on property values but these have fallen and are still trending down. Further, foreclosed mortgages usually don't return full value, particularly in a buyers market. Since foreclosures are high (and trending higher) a higher percentage of the CDO assets will be subject to this haircut. And as housing prices fall, more mortgages are underwater and more owners walk away, raising the foreclosure rate even higher and the foreclosure price even lower.

So in order to value the assets you need to predict a number of factors. 100 people will come up with 100 different answers. Nobody knows the real value.

It appears that both Gross and Burke were a little hasty in their conclusions.

Bear has now admitted that one of its funds has no value at all left for its investors and the other "might" be able to pay 9 cents on the dollar (after the lawyers are through). Merrill's attempt to sell collateral might be interpreted as vengeance for Bear's behavior in the LTCM fracaso. In any case, Merrill had to give it up when it got little or no bids in the market. Good thing (for the time being), since collateral sales by all leveragers would quickly bring the house down. One suspects that Paulson and the other members of the Working Group on the Capital Markets (the Plunge Protection Team, or PPT) have been working behind the scenes to put the kaybosh on such drastic measures. Gross's description of the asymetrical treatment of Wall Street tycoons and mortgagors is right on the money. Burke's talk of "real financial pain" is laughable. Such pain for Wall Streeters would only begin if they were required to regurgitate some of their obscene compensation to repay investors. Don't hold your breath. One thing this bubble popping is teaching us is that the requirements for "sophistication" on the part of hedge fund investors is a joke. In their life style there is no time to inform themselves about their investments. Do you expect them to take their laptops to the beach at St. Tropez? For the protection of the rest of us, hedge funds need to be regulated just as mutual funds are, and they need margin requirments at a rational level, just like stock investors.