From the Wall Street Journal:
Wall Street’s Double Trouble
Faulty Mortgages, Debt-Risk Jitters Weigh on Banks
By APARAJITA SAHA-BUBNA
July 27, 2007; Page C5
Wall Street is dealing with the twin problems of faulty home loans and decreased demand for risky corporate debt.
In the credit-derivatives markets, the rising cost of credit protection for Bear Stearns Cos., Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co., among others, coupled with declines in their respective stocks, reflect investors’ concerns that banks and brokers are at risk of potential big losses.
That’s because Wall Street could be left holding the bag on billions of dollars of debt-laden corporate deals at a time when bad bets on risky home loans are already putting a crimp on earnings and business in the banks’ mortgage units.
Investors in the credit-derivatives market currently see Bear — which has already told clients in two of its hedge funds that their investments are virtually worthless — and Lehman as banks worthy of a speculative, or junk, rating. Both banks are rated investment grade by major rating agencies.
“It’s a double whammy for banks and brokers,” said Sid Bakst, a senior portfolio manager at New York-based Robeco, Weiss, Peck & Greer Investments with $9 billion in fixed-income assets.
“The increasing risk of those two issues is resulting in a repricing across the whole capital structures of securities, with banks and brokers taking the brunt of it,” said Mr. Bakst. “The same concerns are being reflected in equity and debt prices.”
The cost of protecting a notional amount of $10 million of Bear bonds against a possible default for five years jumped to $105,000 a year yesterday, according to one market participant, citing credit default swaps levels. A day earlier, it was $83,500, according to CMA DataVision, a London-based credit-information specialist.
Lehman’s cost of credit protection for $10 million of bonds rose to $100,000 a year for five years from $81,500 Wednesday, while Goldman’s increased by $12,000 to $80,000. The cost of protection for Merrill bonds jumped to $80,000 a year from $69,000 a day earlier.
Sentiment was further damped by weak sales data on new and existing homes, and, dismal earnings from home builders who set off new alarm bells on the distressed U.S. housing market, with D.R. Horton Inc. and Beazer Homes USA Inc. posting losses while WCI Communities Inc. said it couldn’t find a buyer.