As the subprime market has tanked, a recent Bloomberg article (hat tip Doomer John, who circulated an email about this earlier today) takes a timely and extremely insightful look at the fallout — what’s insanely interesting here is that as investment banks hesitate, hedge funds are swooping in to fill the new subprime void:

The subprime crisis is making investment banks more reluctant to bid for new pools of distressed loans that come to market and that’s giving hedge funds “quite a bit more clout,” said William Looney, an executive vice president at Boston-based Debt Exchange Inc., which brokers sales of loans for banks and securities firms. … “When the market was healthier, we found more value in securities,” said Laurence Penn, a former Lehman mortgage-trading executive who helped found New York-based Ellington in 1994. In today’s distressed market, the individual loans look like better deals, he said. … “You’re seeing hedge funds beating the traders to the punch,” said Jeffrey Garfinkle, a partner of the law firm Buchalter Nemer, who specializes in mortgage-company financing.

And, of course, not just for pooled assets — hedge funds and private equity are jumping in to buy originators as well, as HW readers know well. Hearing the hedgies talk about scratch-and-dent nowadays sounds eerily familiar to Wall Street’s former chorus line:

“Most people will tell you there’s no such thing as a bad loan, just a bad price,” said Thomas McCarthy, co-head of loan sales at Carlton Group Ltd., a New York-based real estate investment-banking firm.

All of which begs an extremely interesting question: can hedge funds do subprime better than Wall Street? Update: Tanta at Calculated Risk doesn’t think so.