Uh, Oh!

Remember how the subprime collapse was "contained?" Well, not according to this story. It seems that even after selling $4 billion of mortgage CDO's on Thursday to meet a margin call. There's been no word on what they lost on the sale. However, it appears that they weren't able to meet the call. Nice of them to hide the news over the weekend. I wonder how deep this runs. It's probably really bad. The fund is a $6 billion fund. They lost 23% Jan. through April. That's about $1.5 billion. They had $300 billion in redemptions before they prohibited them. Who knows how much they lost on the margin call. 10%? Now Merrill seizes $400 million. The fund will close, but how badly will it hurt Bear Stearns? Merrill? The industry?

Just another reason to short the market beginning with bonds, financials, and homebuilders.

It seems to me that there's a distinct risk of a scenario that I haven't heard from anyone. It plays out like this. The U.S. slides into recession, and defaults go up. The Fed cuts. Instead of going down, the 10-yr. rates climbs higher and higher, causing defaults which in turn cause a higher rate. Remember, the Fed only controls one end of the yield curve.