Problems in the subprime fixed-income market played perhaps a larger-than-expected role in presentations and discussions among the experts at Morningstar's annual Investment Conference, this year held at Chicago's McCormick Place, June 27 to 29. The timing of the conference was perfect for starting a debate about the extremely complex issues that are unraveling part of the bond markets following the seizure of hundreds of millions of dollars of assets by Merrill Lynch from a Bear Stearns hedge fund to which Merrill had lent money, the High-Grade Structured Credit Strategies Enhanced Leveraged Fund, according to Wall Street Journal
reports.
Fixed-income experts addressed the fallout from the subprime universe in opening and closing sessions of the conference, starting with keynote speaker Jeffrey Gundlach, CIO of TCW Investment Management and Morningstar's 2006 Fixed Income Manager of the Year, who asserts that for a number of fundamental reasons, coupled with the complexity of how these structured securities–for they are not bonds–are created, rated, valued, and the very illiquid market for these securities, the subprime market is a "total unmitigated disaster."
The insulation advisors might think clients would have from these synthetic products may evaporate as more of the story is told, for, as Gundlach puts it, if you've heard, "don't worry, it's AAA," in reference to collateralized mortgage obligations (CMOs), and collateralized debt obligations (CDOs), "in the world of subprime [they] could be on the margin of risk." (For more about the possibility of subprime tainting clients' accounts, please see lead story in the Broker/Dealer Briefing section.)
