Wednesday, July 18, 2007

Subprime Mortgage Meltdown Begins To Gather Steam

The meltdown in the subprime mortgage market is gathering steam and beginning to be widely felt. Yesterday, Bear Stearns told its clients that two of its hedge funds were now worthless.

Bear Stearns, the nation's fifth-largest investment bank, began disclosing in March that the two hedge funds had sustained heavy losses tied to subprime loans extended to risky borrowers. At the time, its High-Grade Structured Credit Enhanced Leveraged Fund was worth about $638 million -- and now has no value.

Meanwhile, the larger and less-leveraged High-Grade Structured Credit Fund lost 91 percent of its value. It was worth about $925 million before taking on losses in March.

Ouch! That's a total loss of 1.4 billion dollars! At this is just at one firm - and a firm that was considered the "pre-eminent Wall Street firm dealing in mortgage-backed securities." And those funds were "High Grade", meaning they was supposed to invest mostly in "highly rated" securities. Wait until the other firms start reporting. Wait until more of these subprime mortgages have their interest rates reset in the next couple of years.

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