"An unprecedented attempt by a Wall Street house to dump its mortgage bets." That's an eye-catching sentence, isn't it? It refers to an IPO of a Bear-Sterns-managed lending company called Everquest.
Many economic-types I know are very worried that trillions in wealth could simply vanish over the next several years, triggering a series of steps that would lead to a massive collapse of the American economy.
Everquest is a fledgling financial-services company that has been buying up equity interests in risky bonds backed by subprime mortgages from hedge funds managed by Bear Stearns (BSC)—one of Wall Street's biggest underwriters of mortgage-backed securities and other exotic mortgage-related bonds. The deal appears to be an unprecedented attempt by a Wall Street house to dump its mortgage bets.
The sales pitch for the IPO, which Bear Stearns is also underwriting, is that Everquest will "provide attractive risk-adjusted returns" to shareholders by investing in collateralized debt obligations (CDOs)—a sophisticated bond that's made up of pieces of lots of other asset-backed bonds. The nine-month-old company expects to produce reliable earnings from the quarterly cash flows generated by the underlying "financial assets" in the 19 CDOs it either owns outright or has a majority equity interest in. Everquest's portfolio of CDOs is valued at about $720 million, of which nearly two-thirds were purchased last fall from hedge funds managed by Bear Stearns Asset Management, a subsidiary of the Wall Street firm.
But Everquest's portfolio could be a time bomb. A "substantial majority" of the CDOs are backed by mortgages to home buyers with risky credit histories, according to its filing with the Securities & Exchange Commission.
Bloomberg has this scary stat:
The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said today.