Wednesday, June 27, 2007

CDOs making waves in financial markets

Bloomberg
Rising defaults on U.S. subprime mortgages have pushed at least 60 mortgage companies to close or sell their operations and forced Bear Stearns Cos. to offer as much as $3.2 billion to bail out a money-losing hedge fund. New foreclosures jumped to a record in the first quarter, led by subprime borrowers, according to the U.S. Mortgage Bankers Association.

The housing market may deteriorate if there's an ``overreaction'' from regulators, said Bitsberger, a former U.S. Treasury official.

The fallout will also increase if investors and hedge funds rush to unwind their positions at the same time, he said. The market's ``financial infrastructure'' is ``untested'' because of the pace of growth in bonds backed by mortgages and other debt, known as collateralized debt obligations, he said. CDOs package bonds, loans or credit-default swaps and use their income to pay investors.

Young Market

The market for asset-backed debt is ``still relatively young and relatively new and we've still yet to see a shakeout,'' he said. ``The jury's still out as to how this will play out. I don't want to say that we're in untested waters but it does scare a lot, it does become a bigger issue among many more hedge funds.''

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