Wednesday, June 27, 2007

SEC probes troubled subprime market

SEC probes troubled subprime market
By Michael Mackenzie in New York and Jeremy Grant in Washington
Copyright The Financial Times Limited 2007
Published: June 26 2007 23:47 | Last updated: June 26 2007 23:47

The Securities and Exchange Commission on Tuesday said it had initiated a broad-based investigation into the troubled subprime mortgage market.

Christopher Cox, chairman of the SEC, told a congressional panel that the regulator was investigating a dozen subprime mortgage issues, including collaterallised debt obligations (CDOs), which are repackaged pools of debt sold to investors.

The SEC is also looking into issues surrounding the secondary market for these instruments.

Concern among investors has intensified in recent days over the fallout from troubles at two Bear Stearns hedge funds. The firm on Tuesday said it planned to extend a $1.6bn (€1.2bn, £800m) loan to one of its funds, the High-Grade Structured Credit Strategies Fund, which had suffered large losses from investments in the subprime market.

Subprime-related CDOs feature prominently in the Bear Stearns funds.

Dominic Konstam, head of interest rate strategy at Credit Suisse, said Moody’s estimates that CDO sales reached $506bn in 2006, of which more than half contained subprime exposure.

“If there is contagion, the problem certainly has sufficient scale to become a financial event,” he said.

Bear Stearns closed 0.2 per cent higher at $139.35 on Tuesday but the stock has fallen 14.4 per cent this year.

John Nester, a spokesman at the SEC, said: “Because they are bank instruments, there is increased co-operation [between regulators] as we examine these things.”

The worries over subprime exposure on Wall Street have rattled stocks and sparked safe-option buying of short-dated government bonds. Volatility has been rising and corporate bonds have weakened in value.

David Ader, strategist at RBS Greenwich Capital, said: “The CDO worries have progressed to the regulatory level.

“Although it is unclear which firms will be directly impacted by the investigation, one thing does logically follow, this month/quarter-end will see a push toward accurate marks on these assets given the increased regulatory scrutiny.”


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