Some housing bubble news from Wall Street and Washington. "Agents with the U.S. Securities and Exchange Commission spent Friday monitoring the last day of business at the Irvine offices of Brookstreet Securities, which closed to retail customers this month after failing to meet margin calls on complex mortgage-based investments."

"Several Brookstreet clients told the Orange County Register this week that they did not understand the risks involved in the investments that led to the company's collapse."

"30 Brookstreet Collateralized Mortgage Obligations (CMOs) reviewed by the Register were more complex than most CMOs. Most are 'interest-only strips,' which pay investors the interest stream but no principal from mortgages."

"Stanley Brooks, Brookstreet's founder and president, said the accounts collapsed because the clearing firm...used what are called 'notional values' to price the CMOs. Those values plummeted as confidence plunged in mortgage-backed securities to subprime home loans."

"'We never had a performance issue,' Brooks said of the CMOs. 'We had a notional pricing disparity.'"

National Mortgage News. "A hedge fund whose identity we know is having subprime-related problems similar to Bear Stearns, one veteran investment banking source told us. We are not releasing the name of the fund until we can confirm more information about the fund and its problems."

"Meanwhile, several sources tell us that the CDO (collateralized debt obligations) market is in serious trouble. CDOs that invested in subprime assets are being hammered. 'Most of these are held by insurance companies and foreign accounts,' said one banker, requesting anonymity."

The Street.com. "Bond funds may have a reputation for being boring, but anybody who attended Morningstar's annual mutual fund conference in Chicago last week might have the impression that the fixed-income market is the most dangerous part of the U.S. financial system right now."

"'People thought they had triple-A bonds with low risk,' (said) Jeffrey Gundlach, chief investment officer at TCW Group. 'They didn't think that they had high-risk resecuritizations. Most of these bonds shouldn't have a triple-A rating.'"

"'What happens to subprime going forward is a debate between bad and horrible,' said Keith Anderson, chief investment officer of fixed income at BlackRock."

"He plants the blame for the subprime mortgage mess firmly at the feet of the bond rating agencies, saying, 'they are a huge concern.'"

"'These ratings are artificial because they have been relying on recent historical prices in a rising market,' the fund manager said. He added, 'You will find the investors in these instruments are either hedge funds or leveraged accounts, but the vast majority is overseas.'"

"Robert Rodriquez, chief executive officer of First Pacific Advisors, was even more blunt. 'We haven't seen much of a problem in the subprime area [but only] because the pricing is a fraud; the ratings are bullshit,' said the two-time recipient of Morningstar's Fund Manager of the Year."

"'I don't buy these prices, but as long as someone can provide capital to keep the finger in the dyke, the charade will go on,' Rodriquez said."

"'It is estimated that U.S. banks have invested 10% of their assets in collateralized debt obligations,' he said. 'And 40% of the CDOs are in subprime mortgages. I'm trying to get details on the components and I can't get any. This is setting up the next catastrophe?'"

From Bloomberg. "Treasury investors can thank Bear Stearns Cos. for smothering the bear market. 'It's a story of yields and risk premiums working their way back to fair value,' said Colin Lundgren, who manages $40 billion for RiverSource Institutional Advisors. 'The story has shifted from economic data to the subprime mess and how investors are positioned.'"

"'I'm personally very cautious about the risky side of the fixed-income market,' said Daniel Fuss, a vice chairman at Loomis Sayles & Co. whose Loomis Sayles Bond Fund has been the best performer among its peers the last decade. While the losses from Long-Term Capital were contained by the securities firms and banks that traded and loaned money to the hedge fund, 'this one has certainly fed into the broader economy via the mortgage market,' he said."

The Wall Street Journal. "Lehman Brothers Holdings Inc. is a prime example of how Wall Street's money and expertise have helped transform subprime lending into a major force in the U.S. financial markets."

"Now, however, that business is in deep trouble, and some consumer advocates and policymakers are pointing the finger at Wall Street."

"Before the mid-1990s, mortgage-backed securities consisted mostly of loans to borrowers with good credit and cash to make ample down payments. Then investment banks found they could do the same with riskier loans to borrowers with modest incomes and flawed credit."

"Pooling the loans created a cushion against defaults by diversifying the risk. The high interest rates on the loans made for bonds with high yields that investors savored."

"At the sector's peak in 2005, with the housing market booming, loan defaults remained low. Wall Street pooled a record $508 billion in subprime mortgages in bonds, up from $56 billion in 2000, according to trade publication Inside Mortgage Finance. Lehman topped other Wall Street firms over the last two years, packaging more than $50 billion in subprime-mortgage-backed securities in both 2005 and 2006."

"Twenty-five former employees said in interviews that front-line workers and managers exaggerated borrowers' creditworthiness by falsifying tax forms, pay stubs and other information, or by ignoring inaccurate data submitted by independent mortgage brokers. In some instances, several ex-employees said, brokers or in-house employees altered documents with the help of scissors, tape and Wite-Out."

"'Anything to make the deal work,' said Coleen Columbo, a former mortgage underwriter in California for Lehman's BNC unit. She and five other ex-employees are pursuing a lawsuit in state court in Sacramento that claims BNC's management retaliated against workers who complained about fraud."

From Reuters. "Mortgage finance companies Fannie Mae and Freddie Mac could face a multibillion dollar loss if subprime assets continue to mount, according to an analyst report."

"'Looking only at their non-AAA positions, a writedown of 15 percent to 30 percent would mean a $1.8 billion to $3.6 billion hit for Fannie and a $1.5 billion to $3 billion hit for Freddie,' the report said."

"Benchmark subprime mortgage ABX indexes fell to fresh record lows in nervous trading on Monday, as concerns mounted over the rapid deterioration of subprime loans made last year, traders said."

"'It's another big selling wave. There's really no new information. The repricing in the index is more sentiment driven,' said one ABX trader."

"June's remittance reports, which provide a snapshot of subprime loan performance over the last 30 days in outstanding pools of ABS securities, showed delinquencies were increasing."

"'Forced sales represent a looming and relatively new technical risk to ABS CDO valuations, given hedge funds' mark-to-market sensitivity and leverage. Price volatility is expected to rise as dealers reduce liquidity and willingness to finance these trades,' said Christopher Flanagan, JP Morgan analyst."

The Financial Times. "The near collapse of two hedge funds run by Bear sparked fears of a rout in debt markets and of a sudden end to the buy-out bonanza. The doomsday predictions were cut short by Bear's offer of $3.2bn to bail out the less leveraged of the funds."

"Without the intervention, the received wisdom goes, credit markets would have been roiled by a "fire sale" of the collateral, slices of subprime loans, held by the creditors (aka other investment banks)."

"By helping its hedge fund, Bear could have changed the future rules of the game. Consider this. Bear, and other banks, treat their hedge funds as arm's length entities, independent of the parent company. The classification enables financial institutions to keep hedge funds, and their liabilities, off balance sheet, thus avoiding the need for provisioning and other costly regulatory requirements."

"Even if regulators fail to notice the double standards, capital markets ought to spot a glaring pricing mismatch. Banks are reaping high-risk rewards for not so risky work with funds implicitly backed by other houses, a situation that could encourage excessive lending."

"I do sympathise with creditors asking for a parent company's help in sorting out a financial mess. But neither party can have it both ways: if the funds are independent they should be left to fail. If they are not, Bear and the creditors should shoulder higher regulatory and financial burdens."

The Associated Press. "No doubt investors have been rattled by the unraveling of other risky debt, namely the near-col lapse of two Bear Stearns hedge funds that had big holdings in subprime mortgages. That came as interest rates here and abroad have been rising, thereby increasing the cheap borrowing cost."

"The tide has definitely turned. Investors have begun to balk at taking on risky debt. 'The buyers of debt are saying that things have just gone too far,' said Kingman Penniman, who heads the bond research firm KDP Investment Advisors."

"Still, none of what has been going on is necessarily bad news. 'This wake-up call allows us to focus on some of the market's excess,' U.S Treasury Secretary Henry Paulson said this week."