Some housing bubble news from Wall Street and Washington. The Orange County Register. "In another fallout from Orange County's subprime mortgage industry collapse, Brookstreet Securities Corp., an Irvine broker dealer, shut its doors and laid off 100 local employees because it could not meet margin calls on complex securities backed by faltering mortgages, company spokeswoman Julie Mains said."

"The securities, known as collateralized mortgage obligations, lost value as Wall Street confidence in mortgage-backed securities collapsed. Mains said the value of Brookstreet's securities plunged to 18 cents on the dollar, forcing the company to dip into its capital to meet margin calls, which is when investors must increase deposits to meet minimum account requirements."

"'It wasn't a problem with securities,' she said. 'It was a problem with the margins.'"

"Stuart Meissner, a New York attorney and former securities regulator, said he received calls from people whose Brookstreet accounts went from $250,000 to negative value. 'They were supposedly guaranteed 10 percent returns,' Meissner said."

The LA Times. "One Brookstreet broker, who declined to be identified, attributed Brookstreet's troubles to a bond division at the firm that had set up a special website for wealthy investors. The broker said the site allowed investors to purchase collateralized mortgage obligations with as little as 10% down and the other 90% borrowed, rather than the 50% down that is typically required on such margin accounts."

"A combination of rising longer-term interest rates and defaults on sub-prime mortgages caused the mortgage bonds to lose value, losses that were greatly magnified because of the heavy borrowing that funded the purchases, the broker said."

"In some cases this would more than wipe out an investor's entire position overnight, putting the burden on Brookstreet to make up any amounts owed to the National Financial unit of Fidelity Investments, which held the accounts."

"In the end, National Financial began selling the assets of investors as their accounts declined, leaving them, like Brookstreet itself, with huge losses, the broker said."

"'Disaster, the firm may be forced to close,' Stanley Brooks said in his e-mail to brokers Wednesday. 'Today, the pricing system used by National Financial has reduced values in all collateralized mortgage obligations. Many of those accounts were on margin and have suffered horrendous markdowns.'"

From Bloomberg. "Losses in the U.S. mortgage market may be the 'tip of the iceberg' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said."

"'The large volume of subprime ARMs scheduled to reset at higher rates in '07 and '08 will pressure already stretched borrowers,' forcing more loans into foreclosure, the Bank of America analysts wrote from New York. A collapse of the Bear Stearns funds 'could be the tipping point of a broader fallout from subprime mortgage credit deterioration,' they said."

"Countrywide Financial Corp. and IndyMac Bancorp Inc., two of the largest U.S. home lenders, may suffer more than other finance companies because they hold mortgages themselves as well as selling them on to investors, the analysts wrote. They may not have set aside enough money to cover losses, said Bank of America."

"Bear Stearns Cos. is proposing a bailout of a money-losing hedge fund by taking on $3.2 billion of loans to forestall creditors from seizing assets, the biggest rescue since 1998, people with knowledge of the plan said."

"Bear Stearns, the second-biggest underwriter of mortgage bonds, increased efforts to salvage the fund, one of two that made bad bets on collateralized-debt obligations."

"'The problem is not what we see happening, but what we don't see,' said Joseph Mason, associate professor of finance at Drexel University in Philadelphia and co-author of an 84-page study this year on the CDO market. 'We don't know the price of these assets. We don't know which banks are exposed to this sector. These conditions are the classic conditions for financial crises across history.'"

"The first CDOs were created at now-defunct Drexel Burnham Lambert Inc. in 1987. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service."

"CDOs may have lost as much as $25 billion because of subprime defaults, Lehman Brothers analysts estimated in April."

"Bear Stearns's proposal doesn't involve taking equity. Instead, the firm would become a lender to the fund, its loan secured by the assets of the fund."

The Street.com. "Some question the New York investment bank's effort to salvage the failing funds. 'The investor in Bear Stearns' stock is faced with the fact that the company may be lending money at below the rate it earns on capital into an entity where there is nogood way to determinate value of its assets,' commented Richard Bove, analyst at Punk Ziegel."

"'It is also important to understand that $3.2 billion, if this is the right number, is 24.8% of Bear Stearns' common equity,' he warns."

"The sale of the fund's holdings could cause a significant repricing in the overall market because it will give an indication of where to value these hard-to-parse securities. A repricing is a scary notion because subprime has been a mess for investors, and the value of debt with subprime mortgage ties is much lower than it was several months ago."

From Reuters. "U.S. credit derivative indexes reached their widest levels since February on Friday on continuing concerns about possible contagion arising from an auction of some troubled mortgage assets." "

"The index of high volatility credits, which comprises mainly 'BBB'-rated swaps, widened one and a half basis points to 97.5 basis points and the index of crossover credits reached an all-time wide of 170 basis points, three basis points wider on the day, according to a trader."

"Losses at hedge funds managed by Bear Stearns have brought together two of investors' biggest fears in a nasty confluence of risk. First, there is the spectre of hedge fund failure, renewing long-held worries about systemic risks to global assets. Second, there is the threat of a credit market meltdown."

"The nature of the investments at issue, collateralised debt obligations (CDOs) which, in this case, contain at least some subprime mortgages, are more worrisome. 'Hedge fund losses are a minor concern compared to the broader economic damage that would result from an open auction of subprime CDOs,' Peter Schiff, president of Euro Pacific Capital, said in a note."

"A rising of credit costs would come as major central banks are generally tightening monetary policy and global bond yields are rising."

"A major concern from any melt-down would be not just the rise in risks and losses in assets but the potential for a banking crisis as banks were left holding bad debt. The Bears Stearns case after all, does involve at least five of the world's leading financial institutions."

"The market has absorbed sales without incident, but lenders to hedge funds may still be hurt as they're forced to remark positions, said said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union."

"A benchmark subprime mortgage bond index fell to record lows this week, putting bond traders on edge about the prospects for spillover to other credit markets. The so-called 'home equity asset-backed securities' are backed by bundles of loans to homeowners with the riskiest credit."

"'The market is really worried about a contagion,' said Michael Metz, chief investment strategist at Oppenheimer & Co. 'It's an open-ended black hole, and a lot of people are going to take to the sidelines until it's clarified. Nobody knows how serious it is going to get.'"

"'The problem is that marking down the assets to where the market will bid them may in fact be the right thing to do, but no one wants to take the loss,' said Jason Brady, who helps manage $4 billion in bonds at Thornburg Investment Management."

"Some of the assets also include so-called CDO squared structures, which are CDOs of CDOs and even more difficult to value."

"'They only want to sell the higher-quality assets," said Mirko Mikelic, a senior portfolio manager who oversees $5 billion in fixed-income assets for Fifth Third Asset Management. 'Right now there's no trading going on for lower-rated securities.'"

From MarketWatch. "For the second time in a week, the Federal Reserve was urged to draw up tough rules to stem abuses in the mortgage industry on Thursday."

"Meeting at the Fed's headquarters, members of the central bank's consumer advisory council urged regulators to use their legal authority to stiffen regulations about the affordability of subprime loans, to improve disclosure about risky loans and apply anti-abuse rules to as many lenders as possible."

"One action the Fed is reviewing is whether to write a rule about lending only to borrowers with proven ability to repay their loans. Edward Sivak, director of policy and evaluation for Jackson, Miss.-based Enterprise Corporation of the Delta, urged such a rule."

"'We're living in the unintended consequence right now,' he said."

"The problems in the subprime mortgage market aren't yet well enough understood for regulators to propose a quick solution, said Cleveland Federal Reserve Bank President Sandra Pianalto."

"They are complicated by the speed and breadth of financial innovations, Pianalto told a community development conference in Cleveland, and 'I am convinced that there is no single solution or 'silver bullet' that will cure them.'"

"Pianalto said financial innovation had driven down costs for borrowers and provided a wider range of credit choices, but had also brought an increasing number of new players into the mortgage market, from brokers and underwriters to servicers and rating agencies, that at times have conflicting incentives."

"'For example, because a mortgage broker is typically compensated only when a loan is made, he has an incentive to approve the loan. However, this incentive may conflict with the interest of the potential borrower,' she said."