June 21, 2007 (LPAC)--Securities and Exchange Commission (SEC) chairman Christopher Cox told Bloomberg TV today that his agency is now tracking the serious ongoing collapse of two hedge funds operated by Bear Stearns investment bank. "Our concerns are, as you might imagine, with any potential systemic fallout," Cox said, meaning the potential for a domino-style collapse of hedge funds and bond-holders in the crisis-ridden mortgage-backed securities (MBS) market.

Yesterday, Treasury Secretary Henry Paulson was pressed at a Congressional hearing by Rep. Barney Frank (D-MA) about a warning of hedge fund shocks to the whole financial system, given by one of Paulson's assistant secretaries, Anthony Ryan, in a Chicago speech. But Paulson, despite Frank's repeated questions, would not acknowledge the Treasury--or the President's Working Group on Capital Markets, chaired by Paulson--sees any systemic threat.

The threat of a credit-markets crash is now advanced, as several Wall Street banks have started to sell MBS which they seized, as collateral, from the two collapsing funds, which were leveraged with billions in debt equalling ten times their assets or more. This distress sale of MBS threatens the entire $6-7 trillion market in these securities, which are widely held by hedge funds and other banks. The mortgages underlying the securities are foreclosing at a record rate as the U.S. and other housing bubbles pop. If MBS have to be marked down throughout the markets in the fall-out from the Bear Stearns fire sales, there could be worldwide losses estimated up to $1 trillion in a short time, causing a crash.

A Bloomberg June 21 wire reported the Merrill Lynch threat to sell $800 million of the MBS seized from Bear Stearns' hedge funds, "is sending shudders across Wall Street."