Ripples spread in the sub-prime pond

As I said the other day, this has less to do with sub-prime lending or sub-prime mortgages than hedge funds who concoct bonds out of them and try to increase their yields. There’s lending, then there’s debt, then there’s investing in debt, which isn’t the same thing.

“Queen’s Walk fuels subprime concerns” is the story. Queen’s Walk is a fund founded by fund manager Cheyne Capital. I’m assuming without checking that it is named after the Queen’s Walk.

It is in the news because of a bit of a bath it took, recently. Having made EUR9.7m profit last year, it has now lost EUR67.7m this year, according to today’s announced results, having chased yields into risky debt, highly-leveraged lendings, sub-prime mortgages. You get the idea. Twelve percent of its holdings were sub-prime-mortgage-oriented US debt. The story doesn’t say how much UK debt it had invested in, however risky, but they wrote their assets down 50% in the quarter, selling it off quickly and getting the fund’s leverage ratio down from 28.6 x assets to 6.6 x assets.

If nothing else, this suggest writing on walls that I can’t see, but presumably someone at Cheyne Capital can? That’s a big loss, but it was also a big reduction in exposure, and they seem happy enough with the move.

Stuart Fiertz, a founder of Cheyne Capital said: “What is happening in New York is that people are seizing funds to make margin calls – but we are in a totally different position – we have €50m of cash on our balance sheet. We have derisked the company and repositioned us to go forward. The worst is over.”

Looks like the market agrees – it’s better to take a loss now if it gets you out of exposure to risky debts:

Queen’s Walk Limited

That’s a pretty small price-drop for that sort of a loss, I would think. Implications? The market doesn’t appear pleased with where these sectors are heading. I mean you know it’s bad when get-rich-quick schemes build themselves around something.

Across the US, Americans are gathering to learn how to invest in properties threatened with foreclosure.

One such seminar was held recently outside Washington, near Prince George’s County, Maryland, the cradle of America’s black middle class and an area hard hit by mortgage foreclosures as a wave of high-interest lending collided with falling property prices.

Several hundred African Americans gathered to listen to “Master Lloyd” and “Queen Vicki” Irvin tell them how to make “life-changing money” from investing in property.

The session was long on revivalist and motivational rhetoric – lots of talk about self-esteem, conquering fear and “giving back to the community”.

Internet sites also list properties in default and offer “how-to” guides on property short sales (deals where investors buy default properties from the lender at a deep discount and resell at a profit). Television adverts promise “win-win” schemes where families keep their homes, and investors get rich helping them. The TV series Flip this House shows how to generate equity from neglected homes.

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