June 23, 2007 (LPAC) -- Peter Schiff, president of the Connecticut-based Euro Pacific Capital, warned about a potential "catastrophe" in the CDO (collatoralized debt obligations) markets, due to the Bear Stearns hedge funds collapse (see Stearns Self-Bailout)

"As long as these CDO bonds stay off the market, as they universally have, asset managers have the luxury of 'marking them to market,'"Schiff wrote in a research note, reported by Dow Jones. "Not surprisingly, using this method the vast majority of these bonds are valued at par or greater. "But if the Bear Stearns bonds were auctioned in the open market, their real values would be exposed. "This would force other hedge funds to similarly mark down the value of their holdings. Is it any wonder that Wall Street is pulling out the stops to avoid such a catastrophe?," Schiff wrote.

Worse than the impact of hedge fund losses, would be the impact of an open market auction of subprime CDOs. "Their true weakness will finally reveal the abyss into which the housing market is about to plummet," Schiff wrote.