Bear Stearns Criticized For Helping Delinquent Subprime Borrowers

How do you suppose policymakers would react to this story about a hedge fund's efforts to prevent Bear Stearns (BSC) from trying to help delinquent subprime mortgage borrowers avoid foreclosure, if it were splashed across the front page of the New York Times or Washington Post, rather than running on page C3, as it did yesterday, of The Wall Street Journal? My guess: they'd be ticked!

The issue as I understand it is this. Lenders usually do better financially if they occasionally grant temporary forbearance (or even outright loan modification) to borrowers when they fall behind, rather than put the poor schlubs into foreclosure. As the subprime swoon has progressed, many lenders have actively begun to pursue such loss mitigation strategies. A win-win! There's just one problem: most of these delinquent loans have been securitized and sold to third parties. If you change the terms of too many loans in a given deal, you screw up the accounting for the sale--and the deal has to go back on the lender's balance sheet. That's the last thing the lender wants to have happen. So what Bear Stearns (via its EMC subprime lending unit) is apparently doing is swapping good loans into trusts it's sold and taking the bad ones out. The firm then can pursue workouts with those delinquent borrowers offline. So for once, believe it or not, Wall Street is doing what it can to help the little guy.

Not so fast. Now comes subprime bear John Paulson, head of $11 billion Paulson & Co., which is short the ABX subprime index and long a bunch of MBS CDS's, lobbying regulators to force Bear to put a stop to its workout efforts, so the delinquent borrowers can crash and burn the way they're supposed to. Nice!

Look, for all I know, Paulson's complaints about Bear unfairly manipulating markets may even have some validity. Still, I'd love to hear what the guy would have to say if he ever got dragged in front of Sen. Dodd's committee...

Comments

[Rishi Shah:]

Hi Matt

The only thing i would add is that there are definitely other motives behind Bear's "kindness" in this situation. They are long the same CDS that Paulson is short. What they could lose if the loans default (which they are on their way to doing) will be a multiple of the cost of bailing out these guys. So while it seems that they are being altruistic, we have to remember that this word is not in finance dictionaries.

RS

2007 Jun 12 03:45 PM