Ten years ago yesterday, Bear Stearns sent a letter to shareholders of two specific hedge funds that it sponsored. Whenever anyone brings up the name now, you immediately know where this is going. That wasn’t the case in 2007, however. Whatever the world may think of Bear in hindsight, a decade ago it was a highly reputable firm.
These two particular hedge funds had earlier that year caused a rumble throughout the shadow system. On July 17, 2007, the bank finally declared them all but worthless, total wipeouts. In the mainstream, nobody could quite figure out why apart from invoking the generic idea of subprime mortgages. Everyone knew, or claimed afterward to know, that they were risky, but pinpointing the exact point of failure proved incredibly difficult. Something, something, CDS.
I wrote on August 1, 2007:
The strategy for the hedge funds, in simple terms, was to invest in senior tranches backed by subprime mortgages, hedged by puts against an ABX index. Information on the exact nature of the investments is still hard to come by under the veil of hedge fund secrecy but it looks to be that 90% of the investments were senior or better, meaning that 90% of the assets were AAA rated…
This post was published at Wall Street Examiner on July 18, 2017.