A group of hedge funds is telling the U.S. Securities and Exchange Commission to be on the lookout for manipulation of bonds backed by subprime mortgages, Bloomberg reports.
Paulson & Co., based in New York, told the SEC that investment banks may pay inflated prices to buy bad loans that are collateral for bonds, says Michael Waldorf, a senior vice president at the hedge fund.
Removing delinquent loans may prevent bonds from defaulting and triggering losses in the banks’ investments in derivatives, he says. Waldorf declined to name the other hedge funds that also warned the SEC.
“We hope you will clarify the application of the anti-manipulation provisions of the federal securities laws to credit default swaps in order to assure market participants that no one will be allowed to engage in manipulative practices,” according to a copy of a letter sent to the SEC and Bloomberg News. Waldorf confirmed the contents of the 14th May letter sent to Erik Sirri, director of the SEC’s division of market regulation.
Bondholders stand to lose as much as $75 billion on securities made of mortgages to people with poor or limited credit histories because of a rise in defaults, Newport Beach, California-based Pacific Investment Management Co. estimated in April. Delinquencies and defaults on subprime loans in bonds are the highest since 1997, Arlington, Virginia-based Friedman Billings Ramsey Group Inc. says.