The Fallout From the Subprime Debacle Continues

On Tuesday night The Journal reported that Bear Stearns (BSC) had told investors that two of its hedge funds' assets are almost worthless:

Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds' investors that the portfolios' assets are almost worthless, according to people familiar with the matter.

Also, be on the lookout for a breaking Moody's story. Theflyonthewall.com reported that Moody's has downgraded 8 ABS deals sold by Bear. ABS does not stand for Australian Bureau of Statistics, or Acrylonitrile butadiene styrene, or American Bureau of Shipping, or even Six Pack Abs. No, in this case, ABS stands for Asset-Backed Securities.

ABS issuance has already been down this year versus last year. You can bet Tuesday night's downgrade is tied to subprime components of this stuff that Bear issued which of course is the key component to the good ole' structured finance CDO.

I wrote about subprime at CNBC.com on Tuesday morning. Mike Metz at Oppenheimer gave me a few good quotes Tuesday morning. He's dead on concerning the lack of tolerance for this stuff when it spreads into the world of hedge funds:

"The issue is the credit ramifications for those who have leveraged themselves to take positions in subprime loans. This is going to result in significant losses for those investors/speculators and the market can live with that," said Michael Metz, chief investment strategist at Oppenheimer.

"What the market can't live with is a phase of forced liquidations at hedge funds which are leveraged to the hundreds of billions, but frankly there's no clarity on that issue."

Metz says the toxicity of what's occurring in subprime debt is making "stocks look like the least overpriced and dangerous" of the asset classes for now. He also notes that "leverage in the system is not tied to corporate America where balance sheets "look great."

"Not to sound cynical, but the stock market has one claim, it's going up," says Metz who says traders will have to look over their shoulders as "no one knows who's exposed and to what degree" to leveraged investments tied to sagging mortgage securities market.