Sunday, 2 September 2007

Incoming

The battle is over in the sub prime markets. Now we are seeing the aftermath, as the wounded report and the dead go into bankruptcy.

This story from Reuters:

"NEW YORK, Aug 29 (Reuters) - Basis Yield Alpha Fund, a hedge fund specializing in corporate and structured credit, on Wednesday filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets, court papers show.

The Cayman Islands-registered fund, run by the Australian firm Basis Capital, listed more than $100 million of assets and more than $100 million of liabilities in its filing with the U.S. bankruptcy court in Manhattan. The fund firm managed nearly $1 billion earlier this year.

In court papers, Basis Yield said it had in June begun to suffer a "significant devaluation" in its asset portfolio, following market volatility related to U.S. subprime lending defaults. It said the devaluation led to margin calls, which it was unable to meet, and the issuance of several default notices by counterparties seeking to close out trades or seize assets.

Basis said JP Morgan Chase Bank NA, Goldman Sachs International, Citigroup Global Markets Limited, Morgan Stanley, Lehman Brothers International (Europe) and Merrill Lynch International all issued default notices. Basis Yield said it has disputed many of these notices.

Earlier in the month, the hedge fund firm told investors that losses at one of its portfolios had lost more than 80 percent in assets. Basis is among a growing number of hedge funds to have be plagued by the credit market turmoil. In July, Sowood Capital lost $1.5 billion and was forced to close down."

Markets have calmed though this week.

In the first weeks of the fiasco, markets failed. We had no way of pricing some of these instruments secured by now suspect sub prime assets. To the point that French bank Paribas suspended redemptions from 3 of their funds.

Now at least we are seeing the extent of the losses. We know there are casualties. We are starting to see the extent of the losses. The markets priced in the end of the world as we know it. Now it is becoming clearer and it is better than terrible.

Still bad, but at least we can measure it. Markets love certainty….hence relative calm is returning.

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