A Bear (Stearns) Market?

Regarding the meltdown in Bear Stearns’ The Economist writes:

“But perhaps the most worrying thing for financial institutions holding mortgage-backed paper is not the subprime market itself, but the unnerving parallels with an even bigger one to which they are also exposed: leveraged loans to companies. As Daniel Arbess of Xerion Capital Partners points out, corporate lending’s giddy leverage echoes the high loan-to-value ratios in subprime; the explosion of “covenant-lite” deals and payment-in-kind notes mirrors that of interest-only and negative-amortisation mortgages; and leveraged buy-outs have their own form of mortgage refinancing in the so-called dividend recapitalisation. Subprime, says Mr Arbess, might well be “a dress rehearsal for something bigger and scarier.”

http://economist.com/finance/displaystory.cfm?story_id=9378742

 

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