Where have all the vulture subprime buyers gone?

NEW YORK (Reuters) - Wall Street's so-called "vulture" debt investors aren't exactly racing to buy billions of dollars of complex U.S. mortgage-related bonds that have sunk in value amid the troubles in global financial markets.

That's a bad omen for banks and other holders of dicey mortgage investments since it shows even the market's riskier players see no bottom to the downward spiral of mortgage defaults, bond rating downgrades, bank losses and stingier lending that is sapping the strength of the U.S. economy.

While mainstream investors might be expected to take flight whenever prices stop making sense and newspaper headlines scream of losses, distressed or "vulture" investors tend to eventually pick over assets more carefully, helping balance markets by providing a floor for thinly-traded bonds.

But despite plummeting prices and a regular drumbeat of fire sales by mortgage vehicles called collateralized debt obligations, or CDOs, many vultures aren't touching subprime mortgage securities with a ten-foot pole.

"The CDO space is in a state of distress beyond repair," says Stuart Goldberg, a managing director at $10.7 billion hedge fund Marathon Asset Management in New York.

"It's a melting ice cube," Goldberg says. "The CDO of (asset-backed securities) is a very different animal than the typical generic distressed marketplace. There are literally deals and many assets within the ABS CDO space that have no value."

For years, Wall Street banks and money managers fueled a boom in mortgage lending by bundling risky mortgages into complex debt pools called CDOs that were sliced into different layers of risk and sold to global investors.

With borrowers now defaulting on their loans and falling into foreclosure, hundreds of billions of dollars of subprime mortgage bonds have been downgraded and more are likely to come.

A key problem for any players who are hoping to buy such assets is that they can't predict the full extent of U.S. home price deterioration, mortgage defaults and foreclosures.

Without more certainty on that data, the outlook for credit-rating downgrades on mortgage bonds and losses is a mystery.

"Money, by and large, still sits on the sidelines," David Peress, managing director at Crystal Capital, a private investment firm in Boston, told a conference of distressed debt players in New York last week.

"One recurring theme you hear is, 'I don't want to be the guy that catches the falling knife'," he said.

Smaller hedge funds and asset managers, meanwhile, may be too strapped for cash themselves to chase opportunities.

And it's also simply hard to raise cash for a distressed fund, with many smaller managers of CDOs failing in attempts to start such funds, sources said.

"There are a lot of people trying to do that, and I don't think they're being very successful," said Jeffrey Gundlach, chief investment officer for TCW Group in Los Angeles, one of the largest CDO managers.

LOOK WHO'S BUYING

Of course, there are some investment firms like Los Angeles-based Metropolitan West Asset Management that have been raising cash to buy distressed subprime mortgage bonds.

"There's well over $10 billion of opportunity money that's already been raised and beginning to be put to work," said Bryan Whalen, portfolio manager at Metropolitan West, who adds that this figure is likely to increase.

Other players are buying entire portfolios of liquidated CDO assets from Wall Street banks.

And some investors like Insight Investment, part of the HBOS Group HBOS.L, may be starting to dip their toes in some types of CDOs. For details, see ID:nL05656399.

After all, the riskiest ABX indexes that track subprime mortgages have fallen almost as low as they can go, with the "BBB-minus" rated slice of the 2007-1 index down to 10.64 from the high 90's in January of 2007, according to Markit Intraday.

Whalen also said it makes sense for "vulture" buyers to deploy their cash only gradually, and quietly, and that in any case buyers aren't likely to swoop in until traditional investors have given up all hope of their assets being bought.

But it's not all strategic: "To date, the selling pressure has been far too great and overwhelming even for the opportunistic money," he said.

In the end, it may still be too early for these buyers to jump in with both feet.

"People shouldn't be too eager," said Mark Adelson, a consultant at Adelson & Jacob Consulting in New York. "If they've allocated a certain amount of dollars to this, don't shoot it all before springtime."

(Additional reporting by Dan Wilchins in New York)

(Reporting by Neil Shah; editing by Clive McKeef)