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Guest Charlie The Tramp

Mortgage Pain Won’t Derail The Economy

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Guest Charlie The Tramp
IF you want to be afraid, really afraid, think of the High Grade Structured Leveraged Credit Strategies Enhanced Leverage Fund. This hedge fund, run by Bear Stearns, is struggling to raise cash so it can avoid collapsing.

Its assets consist in good part of bonds backed by sub-prime mortgages, loans made to borrowers who are less-than-good risks. Rising default and late-payment rates have called the value of these mortgages into question, prompting the banks that lent the fund $6 billion to demand repayment. Since the fund has only $600m in investors’ capital, Bear Stearns has no way of repaying creditors, and is scrambling to obtain new loans and new equity capital. In short, the fund finds itself in a position not very different from that of sub-prime borrowers, only on a huge scale.

This might be a matter of no concern to policymakers: bad luck for well-informed and well-heeled investors and lenders such as Barclays, Merrill Lynch and Citigroup that underestimated the risk involved in investing in this fund. But there might be collateral damage. If the assets that underlie the fund, now being auctioned off, bring only knockdown prices, similar assets now valued in trillions of dollars might also be revalued sharply downwards. That would hit the earnings of several big banks, reducing their willingness and ability to lend, possibly contributing to the slowing effect on the economy of falling home sales.

Mortgage pain won’t derail the economy

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