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Only days ago, the bulls must have been giggling to themselves: "we pulled it off." They somehow managed to convince growing numbers of individuals that the subprime disaster was still "contained" -- though it never has been, despite ridiculous comments to the contrary by delusional bankers, drugged out Wall Street "strategists," and Pollyanish pundits -- and that the fallout from related losses at two Bear Stearns hedge funds would, at worst, be limited in scope.

Unfortunately, they may have been premature in patting themselves on the back. In a report set to appear in Wednesday's Wall Street Journal, "Subprime Uncertainty Fans Out," reporters Kate Kelly, Serena Ng, and Michael Hudson reveal more of the ugly truth about the growing illiquidity, margin calls, and losses -- all part of a contagious financial cancer -- that is now beginning to spread throughout the credit markets.

A downturn in bonds tied to subprime mortgages is getting deeper and going global.

[Tuesday], Wall Street firm Bear Stearns Cos. said two hedge funds it runs are now worth nearly nothing after a tumultuous June in which Bear had to promise the funds billions in rescue financing after subprime bets went bad.

Meanwhile, banks yesterday circulated at least a dozen lists of subprime-related bonds they planned to hastily sell to investors. Some of the assets were from a fund managed by Basis Capital Funds Management Ltd., a large hedge-fund manager based in Australia, and were put on the block by Citigroup Inc. and J.P. Morgan Chase & Co., according to people familiar with the matter.

Basis Yield Alpha Fund last week informed its investors it had lost around 14% in June. Another fund, called Basis Pac-Rim Fund, was down 9.2% that month. Basis said the declines came after bond dealers abruptly marked down the value of the securities, which it said were "otherwise fundamentally sound."

Investors are struggling to place values on mortgage-backed securities tied to subprime home loans. Because some of these instruments aren't actively traded, investors worry that they are holding securities on their books at values that are no longer accurate.

Last week Moody's Investors Service and Standard and Poor's, the two big credit-rating services, knocked down their ratings on hundreds of subprime-related bonds.

Delinquencies and defaults have been rising on subprime mortgages -- which are taken out by borrowers with shaky credit backgrounds. Some of these mortgages were subject to fraudulent loan documentation when they were written.

"Right now things are starting to come unglued," said Charles Gradante, co-founder of hedge-fund consultant Hennessee Group.

The net value of assets in Bear's highly indebted fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund, is wiped out, according to people familiar with the matter, who were briefed on the contents of a late-afternoon call with brokers. The net value of assets in its other larger, less-leveraged fund is roughly 9% of the value at the end of March, these people said. The net-asset value represents the value of an investor's holdings after debts have been paid.

The funds invested in mortgage-backed securities and collateralized-debt obligations, which are bundles of bonds. They also made other bets in the mortgage market through different derivatives-investment products.

In March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million.

Late last month, Bear helped stabilize the less-leveraged fund with a $1.6 billion secured loan; the enhanced fund began trying to unwind its remaining $1.1 billion in debt.

The funds' net values, which took more than two weeks to calculate because of the fluctuating values in the market for risky, or subprime, mortgage securities, came amid another tumultuous day for the broader mortgage market.

The ABX index, which tracks the performance of various classes of subprime-related bonds, hit new lows yesterday. In the past few months, the portions of the index that tracked especially risky mortgage bonds with junk-grade ratings had been falling. But now, the portions of the index that track safer mortgage bonds, with ratings of triple-A or double-A are also falling sharply.

The portion of the index which tracks triple-A subprime debt issued last year has fallen about 5% in the past week. The portion of the index which tracks low-rated triple-B bonds is down more than 50% this year.

Investors have been buzzing for days, trying to explain the latest losses in the ABX index, which signaled a deepening panic in the mortgage market. Several factors have been at play, including the ratings downgrades.

It also could have been related to holders of mortgage- backed securities hedging their positions by making bets against the index. Or it could have been because speculators are betting the subprime woes will worsen.

"The decline in the ABX indexes has been significant, and certainly some people are panicking and shorting it further because many assets they own are going down in value," says Alan Fournier of hedge fund Pennant Capital, which has been betting against the subprime market.

Several traders said Calyon, the investment-bank division of French bank Credit Agricole SA, was active in the market. In a May conference call, bank officials said some of its dealings in collateralized debt obligations -- which are bundles of bonds sometimes holding subprime mortgages -- had "suffered from the crisis" in subprime. It could have been forced to hedge against exposure by taking positions that pushed the index lower.

A Calyon spokeswoman said in a statement that the firm doesn't have any "direct exposure" to subprime home-equity loans, though it is involved in warehousing asset-backed securities that are used for CDO transactions that Calyon arranges.

In the statement, spokeswoman Virginie Ourceyre said the asset-backed securities market "has been volatile since the middle of the first quarter. Since then, Calyon has not originated any new ABS CDO deals." She added that Calyon has been "actively managing its credit- trading books."

Separately, ACA Capital Holdings Inc. (ACA), a manager of collateralized-debt obligations listed on the New York Stock Exchange, recently saw its shares plunge after it became apparent that many of the debt pools it manages are heavily exposed to subprime assets.

The company, which listed on the New York Stock Exchange last fall, owns small portions of some of the CDOs it manages, but has been hedging its positions by betting on a fall in the ABX index. That has helped reduce its losses somewhat. ACA shares yesterday rebounded $1.56 to $8.15, but are still down 31% from the start of July. They hit a record low of $6.59 Monday.

As the old Chinese proverb has it: disasters never come alone.

Source: The Financial Cancer Spreading Through the Credit Markets: Subprime Not Contained