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Current Market Turmoil

The fallout from Bear Stearns' hedge funds specialising in collateralised debt obligations (CDOs) has ratted nerves a bit. Bear Stearns bailed out one of the two funds suffering huge losses from the CDO play. Only the one with small losses go rescued not the one with -1 bn USD in losses. The world's bigges bond manager Bill Gross of PIMCO has lashed out at Moody's Investors Service and Standard & Poor as being duped by the make-up and "six-inch hooker heels" of CDOs, and investors now stand to lose all their money.

Sub-prime mortgage bonds made up about $US100 billion of the $US375 billion of CDOs sold in the US in 2006. CDOs are created by bankers and money managers who bundle together debt securities and divide them into slices with varying credit ratings. With defaults on those sub-prime loans rising, buyers of the BBB pieces of some CDOs stood to lose their entire investments.

Sub-prime mortgages are loans made to borrowers with poor or limited credit histories, or high debt burdens. Mortgages at banks with overdue repayments are at the highest level since 1994, according to first-quarter data compiled by the Federal Deposit Insurance Corp. The credit rating companies "were downgrading hundreds of these CDO structures in the last few weeks and that is an early indication of being fooled", Mr Gross added.

At least 60 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. New Century Financial and Res Mae Mortgage were forced into bankruptcy. UBS, Switzerland's biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit after losses linked to turmoil in the mortgage-bond market. The question we have to ask is will this be the turning point of a rise in risk. It is easy to be negative but the subprime asset class has been suspect for moe than 6 months. The implosion in a few hedge funds playing the CDO market was due to over-leverage, and not the inherent risk of CDO itself. One of the Bear Sterns fud bought US$10bn in CDOs on US$600m in equity backing.

Its a bump on the road rather than a blockade. Markets shoud ride this out soon. The other significant news is the vote to be called on removing tax on interest income in China. While the actual impact may not be immediate, the act will signify more moves in store to cool the heated equity markets in China. Some volatiity ahead. Back in KL, some weakness in the ringgit may signify some cashing out by foreign funds on stocks, but its not at a worrying level yet. Hard to fault some funds locking in some gains when market is the second best performing bourse in Asia after Asia.


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