Merrill Lynch discusses dumping $800 million of mortgage securities, rather than trying to bludgeon Jason Giambi.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
(The story doesn’t mention that CDOs also comprise one of the shakiest sections of the bond market, especially those based on mortgages rated subprime or one level above.)
And, plenty of people are worried about fallout:
U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency’s division of market regulation is tracking the turmoil at the Bear Stearns fund.
“Our concerns are with any potential systemic fallout,” Cox said in an interview.
“Systemic,” eh? That’s not a good thing here. BUT, this bubble has to be fully lanced, or like a free-floating piece of arterial plaque, it will land elsewhere.
Blogger Bondad provides more insight:
CDOs are theoretically an insurance policy against a blow-up in the mortgage industry. However, these investments have never been tested by a real problem in the market. That does not mean they won't work as advertised. It simply means that the market has never tested them.
He says Merrill could just be using this as a tool to beat down Bear, or that it could be a more serious issue.
Cross-posted at Socratic Gadfly.
