In yet another of the mounting casualties of the subprime mess Brookstreet Securities hurt by CMOs, may shut down.

Brokerage firm Brookstreet Securities Corp. said it may have to shut down in the wake of a severe liquidity crisis sparked by losses on collateralized mortgage obligations. “Disaster, the firm may be forced to close …,” the Irvine, California-based company told employees in an e-mail on Wednesday.

“It would take a capital infusion of at least $5,000,000 to keep the company in compliance with no guarantee that additional markdowns may not be forthcoming,” the firm wrote in the seven paragraph-long email that details the disaster that the firms says occurred in one day.

Fidelity Investments’ National Financial unit, which acts as Brookstreet’s clearing firm, marked down the values of all of Brookstreet’s collateralized mortgage obligations, Brookstreet said. CMOs are securities of repackaged loans that are divided and sold to investors.

“Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses,” the e-mail said.

On its Web site Brookstreet told potential customers: “We use a careful, conservative approach to business and to investing” and stressed investors are protected by the Securities Investor Protection Corporation and Boston-based Fidelity. However, Brookstreet also warned: “Coverage does not protect against a decline in the market value of securities.”

Brookstreet Recap

  • Brookstreet uses a careful, conservative approach to business and to investing
  • Brookstreet is facing $5,000,000 margin call
  • With no guarantee that additional markdowns may not be forthcoming
  • Investors are protected by the Securities Investor Protection Corporation and Boston-based Fidelity
  • Coverage does not protect against a decline in the market value of securities
  • Coverage? What Coverage?
  • Help Needed – Send $5,000,000

$3.2 billion margin call at Bear Stearns

$5,000,000? Who cares?
Bears Stearns has a $3.2 billion rescue plan [read margin call] in the works that could spur a Takeover of Bear Stearns itself if it fails.

If Bear Stearns Cos. loses a lot of money trying to bail out one of its struggling hedge funds, the bank could be acquired by a rival, an analyst at Merrill Lynch & Co. said on Friday.

Bear Stearns (BSC) unveiled a $3.2 billion rescue plan for its in-house High- Grade Structured Credit hedge fund after it was hit hard by mortgage-derivatives trades that went awry.

Before that, Bear had only invested $35 million in the fund and another more leveraged vehicle called the High Grade Structured Credit Enhanced Leveraged Fund and it hadn’t lent any money to them.

But now the bank has “meaningful exposure,” to one of the funds, analyst Guy Moszkowski wrote in a note to clients of Merrill Lynch. Bear Stearns is one of the leading players in the mortgage market, so the bank should be able to extract value out of the fund’s assets, given enough time, the analyst said.

However, Moszkowski estimated that if Bear Stearns loses half the amount of its loan, that would knock roughly $7 a share off its net earnings in a year. That’s about half this year’s forecast profit, the analyst noted.

He added that if such losses mount, Bear Stearns could become vulnerable to a takeover.

“If the firm is not able to resolve its position without a meaningful loss, we think the likelihood of a sale rises materially,” Moszkowski wrote in the note.

What’s to lose?

Heck, why not bet the farm? Send $3.2 billion to the hedge fund and if the ship sinks anyway some other company is bound to be willing to scoop up the pieces for an insane price (at least according to rival Merrill Lynch).

Unfortunately that is exactly the attitude running rampant through Wall Street. It’s all part of “Buyout Bingo” with everyone trying to figure out who the next buyout candidate is.

Fitch Under Pressure To React

Meanwhile Fitch is clearly under pressure to do something. I can say that because these guys never react except under pressure. The key word in that is react. Credit rating companies that do business with those they rate have a vested interest NOT to react. How do I know they are under pressure? Because they do something as meaningless as this: Fitch Places Bear Stearns’ “CAM2” CDO Asset Manager Rating on Watch Negative. By now the whole world knows the stunningly poor performance of Ber Stearns CDO department. That makes it perfectly safe for Fitch to react.

Fitch Ratings-New York-22 June 2007: Fitch has placed Bear Stearns Asset Management’s (BSAM) ‘CAM2’ CDO Asset Manager Rating on Rating Watch Negative following recent reported adverse developments associated with BSAM’s High Grade Structured Credit Strategies hedge funds, and the resultant uncertainties related to the on-going business strategy and capacity of the High Grade Structured Credit Strategies team.

Perfect Timing

What perfect timing. Thanks guys. Here’s more timely action from Fitch and S&P;: Fitch, S&P; may cut ratings on subprime debt.

Most of the residential mortgage-backed securities originated in 2005 and 2006, and the percentage of delinquencies in that group has risen to as high as 18 percent, S&P; said.

As for Fitch’s rating actions, the flagged CDO securities came from “three 2003 diversified (structured finance) CDOs and one high grade CDO issued last year,” Fitch said in a statement. “The rating action is the result of a combination of credit deterioration within the portfolio” and high exposure to “second-lien” or “piggyback” subprime mortgages, Fitch said, referring to the ACA ABS 2003-1 deal.

Sorry, Too Late

Unfortunately it’s too late for anyone to bail out Ritchie Capital Management Ltd: Ritchie Funds File Bankruptcy After $700 Million Loss.

Ritchie Capital Management Ltd. sought bankruptcy protection for two Dublin-based funds after they lost more than $700 million on life insurance investments. The hedge-fund manager asked the U.S. Bankruptcy Court in Manhattan to approve a $17 million interim loan from ABN Amro Holding NV as part of $30 million in financing for the funds. They owed ABN Amro $436.5 million as of April 30, Lisle, Illinois-based Ritchie said in court filings yesterday.

The funds were formed in 2005 to invest in life- settlements, where wealthy individuals over age 65 sell their policies for less than the death benefit and more than the cash- surrender value. The buyer continues to pay the premiums, betting that the named-beneficiary of the policy will die soon enough to make a profit.

Ritchie affiliates are the largest unsecured creditors. They are owed $290 million, according to court papers.

The firm said it needs new cash “urgently” to pay servicing fees on its life-settlement policies and other operating expenses. As of the bankruptcy filings, Ritchie I owned 849 policies with an aggregate death benefit of $2.3 billion, and Ritchie II owned 182 policies worth $419.5 million.

Ritchie also said it continues to seek buyers for its assets but has yet to identify any prospective purchasers.

No Cash? No Problem.

Even though it is filing for bankruptcy Ritchie “needs new cash urgently” and is seeking a buyer. It seems Ritchie, Bear Stearns, and Brookstreet all urgently need cash. I happen to have just the solution. I’m surprised no one thought of this before.

The Northwest Florida Daily News is reporting Realtors attend worship service to pray for better market.

Hallelujah!
Our problems are all solved.

Mike Shedlock / Mish/