Public pension funds won’t be the only ones holding the subprime meltdown bag

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A great post over at Economic Rebalancing on how the parade of toxic waste mortgage debt continues to get passed on to unsuspecting hedge fund investors; including large pension funds whose managers are taking dangerous risks for the highest yields possible.

Wednesday stock of Novastar Financial was up almost 11%. The day before
the stock of Accredited Home Lenders was up a similar amount. The
reason in both cases was that they companies had found a way to
transfer much of the toxic waste they had created to unsuspecting
investors. In the case of Accredited, the company may arrangements to
be acquired by Lone Star, a private equity fund. The investors in Lone
Star 5, most likely pension plans and public endowments, will be stuck
holding the bag for the defaulted loans stinking up Accredited’s
portfolio

Is any one else upset that endowments who wanted to push returns are jeopardizing future monies available for the charities and universities that they support while getting caught up chasing yield with bottom-of-the-barrel debt that Wall Street didn’t want? I mean – imagine the United Way being under-funded because endowments are eating bad debt. Imagine 5 or 10 scholarships at each school disappearing due to endowment losses in hedge fund investments. It’s amazing how disenfranchising this whole subprime meltdown can ultimately be.

Economic Rebalancing also has an excellent graph (below) that shows just how bad these securitized subprime debt pools have been performing. Can any investor get a price that makes this debt profitable?

It is amazing that pension and endowment fund managers could look at debt like this and say – we can still make good money from it.

Each line above represents a different securitization over time. The
y-axis shows the percentage of loans in the securitization that are at
least 60 days delinquent, The x-axis shows shows the age of each
securitization. The February 2007 loans are going bad even faster than
the amazingly bad 2006 loans.

I think EB sums it up best when they say:

The sub-prime time bomb has not been contained, and it hasn’t difused.
It’s been getting steadily worse, but the bond market hasn’t had a
dramatic reaction. This has given Wall St. time to dump toxic
securities and companies into the portfolios of public and private
pension plans.

Maybe the public fund managers were getting the right price to gamble with public pensions; but can every fund manager make a return that makes sense to gobble up this crap? I mean just statistically not everyone is that brilliant. Someone is going to get burned. The only safe bet? It won’t be Wall Street.