Ok guys, its starting.

First, let's lead with what we know

"Bear Stearns Cos. Inc.'s two troubled hedge funds that bet heavily on risky subprime loans now have "very little value," the company said in a letter sent to investors on Tuesday.

Bear Stearns in June had said it would provide up to $3.2 billion in financing for its High-Grade Structured Credit Strategies Fund. The investment bank had also said its Enhanced Leverage Fund had taken greater risk in investments backed by subprime mortgages.

"The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007," according to the letter. A copy of the letter was obtained by Reuters."

Ok, so that's what we do know. (BTW, if you're wondering what "very little" is, the answer is 9 cents on the dollar. And yes, lawyers are already involved. There will be plenty of work for them in the coming months and years.)

By the way Bear Stearns (BSC) is getting roached in the aftermarket, trading down over $5 from the 4:00 PM close. And it doesn't stop there - Moody's is apparently now talking about more downgrading and the roaching of equities is not contained to Bear - Goldman, Merrill, Lehman, CountryWide financial and others are all getting whacked to one degree or another on potential contagion.

And let's be clear here - this is not likely to just be "potential" this time around. We are very, very likely to see some marks to market start here as these positions "unwind", and each that does can create more of the same.

In addition to this we are now starting to see evidence of stress in the broader credit markets. I know I keep pounding the table on this, but it needs to be pounded. Cerberus is having trouble syndicating the debt to buy Chrysler. If that syndication fails it will touch off a ****storm cascade as this is roughly $60 billion worth of junk debt that has to go out to make the deal happen, and there is another $200ish billion sitting behind that! ANY of the big deals that goes "boom" could set of a cascade of detonations in the credit markets if the explosives are too close to one another.

Now the "street sense" seems to be that this won't happen. Don't bet on it. Right now the bond market has just had woke up to the fact that the roof is on fire fools!

Why? Because you thought these deals were reasonably risk-free and guess what - the entire investment went up in smoke! That's not a small loss, its a total loss!

And just for clarification - we don't know at this point how much of Bear's $1.6 billion is gone either! It may be that all of their "rescue" money is ALSO gone!

So no, you cannot take this lightly. In fact, you better take this situation very seriously.

Guys, back to my thesis of a couple of months ago - all serious equity market disruptions start in the credit markets. ALL OF THEM. Not some - ALL.

So - if you care about the possibility of a no-bull**** market crash, then you need to be paying attention to the credit markets and what they're doing.

It is essentially a given that we will open down tomorrow. How bad? No idea. How much more roaching will be taken overnight, how much pressure does the dollar come under from Asia and Europe, and how many people wake up in a cold sweat at 4:00 AM wondering if this ENTIRE market is built on a foundation of fraud and lies?

If none of that happens, then we start with a down day and finish wherever.

If any of that does happen, or if the margin calls are going out right now on the other hedgies holding similar debt?

Your guess is as good as mine.

BTW, as I write this the dollar is getting roached as well with the Euro breaking the 138 line convincingly. and the Yen and Pound also strengthening. BEWARE if we break 80 on the Dollar Index to the downside, as the ****storm this is likely to cause, especially with this as backdrop, will hit the markets like an EF-5 Tornado!

Labels: Bear Stearns, Roached, Subprime Debt Bomb