J.P. Morgan Holds Off on Bear Fund Asset Auction

J.P. Morgan, a creditor of two collapsing Bear Stearns hedge funds, canceled its $400 million auction of seized collateral minutes before it started on Wednesday afternoon. The collateral consists primarily of mortgage-backed securities, many of which are backed by subprime loans. Morgan reached an agreement with Bear by which it will unwind its positions, meaning it will sell the assets back to Bear for an undisclosed amount of cash. The 'fire sale' atmosphere sent prices downward for similar securities and took the LCDX, a month-old derivatives index tied to junk-rated corporate loans, to its eighth-straight decline and a new low of 99.05. The ABX derivatives index fell to a record low of 59.25. Many of the Bear funds' assets are collateralized debt obligations, or CDOs, complex securities that pool mortgage-backed bonds with other debt instruments. Because CDOs trade infrequently, they are difficult to price, and values are assigned to them. If they flood the market, however, they must be revalued according to where they are trading. Widespread repricing could cause a domino effect of fund liquidations. "People are nervous," said investment manager Jeffrey Gundlach. "Do you want to be the first one out and perhaps cause the lows to be hit in the market, or do you want to wait and see how this all plays out?"

Sources: Wall Street Journal, Reuters, CNBC, New York Post, Financial Times, New York Post
Commentary: Bear Stearns Blowout: Who Will Buy These Assets? • Two Bear Stearns Hedge Funds on Brink of Closure • Bear Stearns Hedge Fund Facing Mortgage Losses -- WSJ
Stocks/ETFs to watch: Bear Stearns Companies Inc. (BSC). Competitors: Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH), Merrill Lynch & Co. Inc. (MER). ETFs: iShares Dow Jones US Broker-Dealers (IAI), KBW Capital Markets ETF (KCE)

Seeking Alpha's news briefs are combined into a pre-market summary called Wall Street Breakfast. Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.

Comments

[dashingdwl:]

LCDX lower this morning / Thursday 757am
LCDX 98.27/98.42

2007 Jun 21 07:57 AM