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Hedge Horror

Date: Thursday, July 12, 2007
Author: Paul Tharp, New York Post

Subprime Meltdown Could Wipe Out Billions:

As home foreclosures ricochet through Main Street in rising junk mortgage meltdowns, Wall Street is facing a separate barrage that could swamp its first rich victims - hedge funds for the wealthy.

The financial industry yesterday got more unhinged following a shake-up a day earlier when two credit-rating agencies stripped away the fragile masks of shaky mortgage securities, exposing their worthless sides.

The stunning formal disclosures, which eventually could affect as much as $2 trillion in various mortgage securities, is expected to trigger widespread revaluation of the paper, which some analysts believe could wipe out 40 to 50 percent of their values.

For hedge funds, it would mean having to cover losses by giving back money to clients, even if it means selling off other good assets at a discount to raise money.

"The hedge funds are so over-leveraged, they'll be the first to crack," said Peter Schiff, CEO of Euro Pacific Capital.

Even Wall Street banks such as Merrill Lynch are vulnerable, with analysts saying the crisis could wipe out $132 million, 1.6 percent, of its profits this year.

The housing crunch sent the dollar plunging to a new low against the euro for the second day, to $1.3787. The greenback fell to a 26-year low against the British pound, at $2.0271.

Alarms also were sounded yesterday for the nation's banks when the Federal Deposit Insurance Corp. chief said it is looking "very carefully" at how many banks are holding junk mortgage paper, particularly a tainted and repackaged version of the risky junk bonds, known as collateralized debt obligations (CDOs.)

An estimated $1 trillion of CDOs are said to be parked throughout the investment community.

Moody's, which a day earlier downgraded the basic junk mortgage bonds, escalated its attack yesterday by downgrading $5.2 billion in subprime CDOs, the first agency to do so.

FDIC Chairman Sheila Bair said she expects a CDO time bomb.

"We're going to see more downgrades," Bair said, adding that she expects the bad news to "creep into higher-rated" securities.

"Its going to get worse before it gets better. How much worse, I don't know," Bair said.