PART 2 IN AN ONGOING SERIES ABOUT FRAUD AT BEAR STEARNS
- Bear Stearns, among other, Sure Knew That Market Demand for MBS Backed by NonPrime Mortgages Could Disappear In the Blink of An Eye.
- Two Meltdowns in 10 years, and yet the Denials Continue.
The future of the “entire subprime industry... [is] in doubt," reported trade magazine US Banker in an August 1999 article about the bankruptcy filing of leading subprime lender FirstPlus. “A host of... subprime and HLTV [high loan to value] lenders have collapsed in the past year...” “A Comet Falls, and Industry Shifts.” US Banker, August 1, 1999.
The article also reported that Bear Stearns (among others) was a warehouse lender to FirstPlus, and that Bear packaged FirstPlus mortgages into MBS. Id.
Why did FirstPlus fail? Because there was a rapid decline in investor demand for “securities backed by subprime and HLTV loans.”
The 1998 Asian and Russian crises and the fallout from those market shocks (think LTCM) produced a classic flight to quality.
In a flight to quality, markets for complex investments like MBS often run dry in periods of market turmoil, because frightened investors move their money to higher quality investments like US Treasuries and highly rated corporate bonds.
That is precisely what happened in 1998. Because of this flight to quality, market prices for some MBS fell as low as “50 to 60 cents on the dollar.” Id.
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To the staff of Wall Street Law Blog, something about this episode seems oddly familiar.
By Brett Sherman