Tip Of the Iceberg??

Them US stocks they didn't do too well, and as reported on CNN, Stocks sold off big Friday, with the Dow industrials sliding more than 176 points, as subprime woes reemerged and investors remained nervous over rising interest rates.

• The dollar hit a 4-1/2-year high against the yen, oil rose, and bonds mounted a mini-rally on a flight to quality.
  
  Stock trading has been volatile in recent weeks due to ongoing worries about whether rising bond yields and mortgage rates would hurt the economy, just as growth seemed to be picking up from a weak first quarter. Those worries returned Friday.
  
  In addition, rumors about more hedge fund problems were hurting the market, according to Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco.
  
  "People think there might be another hedge fund that might be in trouble," said Clark.
  
  The rumors came after two Bear Stearns hedge funds nearly folded earlier this week, apparently stung by bad deals in the subprime lending sector. Bear Sterns said Friday that it's bailing out one fund to the tune of $3.2 billion, and is still working on a rescue plan for the other.
  
  News of the bailout spooked investors.
  
  "This is not over yet," said Awad. "We don't know who's involved, who's not. The whole recovery has been built of confidence, leverage and cheap money. This has the potential to be widespread in terms of seizing up capital."

Cheap money is a huge issue isn't it?

Regarding the subprime woes, here is an excellent blog posting posted on The Big Picture. How Might Subprime Issues Unravel?.

And FSO Market commentator, Brian Pretti gives an excellent write on The "State" of Affairs in Mortgage Lending.

And over at Comstock, The Tip of the Iceberg?

The damage estimates

• It is estimated that various institutions own about $6 trillion of mortgage-backed securities of which about $800 billion are subprime. About 13% of subprime mortgages are currently in default, and foreclosure rates on these loans are soaring.

And how the rise in interest rates would hurt them. $2 TRILLION of mortgage securities which could be adjusted to higher rates!

• In addition about $2 trillion of mortgage securities are backed by adjustable rate loans (ARMS) that have been or will soon be reset at higher rates.

And here is the possible danger.

• There are undoubtedly a large number of other hedge funds with portfolios similar to those of Bear Stearns, and it appears that, in the vast majority of cases, the securities have not been marked to market. The big fear is that any auction of the Bear Stearns holdings will expose the true price of all these holdings and result in immense losses with an unknown, but potentially dangerous chain reaction throughout the financial system. The ratings agencies have generally given these securities high ratings and have only recently started to slash their grades. Last week Moody’s cut ratings on 131 bonds backed by pools of subprime loans and are reviewing 247 others, including 111 it had recently lowered. This could force the sale of bonds that were cut to "junk" from "investment grade" and result in significant portfolio write-downs.
  
  The problem is that what we’ve seen to date is probably only the tip of the iceberg. David Viniar, Goldman Sachs CFO, and former head of firm-wide credit risk, stated that "I continue to believe that we haven’t seen the bottom in the subprime market. There will be more pain felt by people as that works through the system." Ara Hovanian, CEO of big builder Hovanian Enterprises said "There isn’t a recovery about to happen." SEC Chairman Christopher Cox stated that "Our concern is with any potential systemic fallout." In our view the potential effects of the falling housing market on both the economy and the financial arena puts the stock market in an exceedingly risky position in the period ahead.

Posted on Bloomberg News. Bear Stearns Fund Collapse Sends Shock Through CDOs

• Pretty Ugly
  Merrill's decision yesterday to accept bids on $800 million of bonds it took as collateral for its loans further stifled trading in CDO securities, said David Castillo, who trades asset- backed, commercial-mortgage and CDO bonds in San Francisco at Further Lane Securities.
  ``Nobody wants to look at the truth right now because the truth is pretty ugly,'' Castillo said. ``Where people are willing to bid and where people have them marked are two different places.''
  The perceived risk of holding Bear Stearns bonds jumped to a three-month high, according to traders betting on the creditworthiness of companies in the credit-default swaps market.