Quote of the day
“Yes, there was too much leverage in the market. Yes, there was too much appetite for risk and yes, that risk was underpriced,” said Mark Adelson, a senior analyst at Nomura Securities in New York. “But there has not been a lick of spillover of this situation in the corporate bond market or stock markets so I don’t think people need to start hoarding food, water and ammunition because the end is coming.”
This is from a very detailed and instructive New York Times article on the mayhem going on at the hedge fund division of Bear Stearns (BSC:NYSE). Their multi-billion dollar hedge fund was overexposed to CDOs that invested in pools of subprime mortgages. It blew up after just 10 months in business. See our previous posts on the subject, beginning with US subprime borrowers sink deeper into trouble, June 15-07.
If you are trying to piece together what the subprime meltdown might mean for the institutions that, in essence, finance the CDOs and CLOs that soak up all of that corporate debt issued on private equity deals — and how that might eventually lead to tougher credit for your firm — the NYT piece is worth a read.
If the CDOs lose their appetite for corporate paper, and the banks are currently selling 80% of each deal to the CDOs (and the rest of the corporate paper market), who will hold that 80% if the banks don’t? Does the tap turn off for PE land?