Saturday, June 16, 2007

Subprime and LBO

It's a beautiful weekend here in the tri-state NY region, though there are certain Wall Street types - hedge fund types in particular - who must be brooding. Bear Stearns' subprime hedge fund problem is rapidly turning into a complete debacle. The Wall Street Journal is reporting that Merrill Lynch moved in Friday to and seized $400 mln of the subprime fund's assets and will auction them off in the coming week to cover a loan it made to the Bear fund. That could mean the dissolution of the fund. Read more: A 'Subprime' Fund Is on the Brink (subscription). The bigger question that has yet to be answered is whether there are similar hedge fund blow ups lurking.

Meantime, leveraged buyouts - the venerable LBO - has been a key pillar supporting the bull run in the stock market. Is that about to change? This blog has been warning, both extemporaneously and by citing the work of others, that the sudden rise in bond yields has led to changes in the credit markets which could be drastic enough to stem the flow of deals. In a perfect storm like fashion, cash hungry Congress has entered the picture with bi-partisan legislation to lift the tax rate on publicly traded partnerships. That sent shares of Fortress tumbling 8% and Alliance Bernstein (AB) down about 4%. The real target of the legislation is Blackstone (soon to be BX). Read more: Tax Gap Puts Private Equity Firms on Hot Seat.

These are a few situations in the making that don't necessarily mean an end to the bull market in stocks tomorrow, but certainly developments to watch.

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