Bear Sterns Hedge Fund In Deep Doo Doo

[wayneL]

Those that suggested that the sub-prime debacle is contained have proven to be indulging in self flagellation. It's only just beginning.

http://www.ft.com/cms/s/f92171f6-1eb7-11dc-bc22-000b5df10621.html

Subprime puts Bear Stearns fund on brink

By Ben White and Saskia Scholtes in New York

Published: June 20 2007 00:03 | Last updated: June 20 2007 00:03

A highly leveraged Bear Stearns hedge fund that made bad bets on the subprime mortgage market was on the brink of failure on Tuesday after Merrill Lynch rejected a proposed rescue plan and prepared to auction off $850m of assets that the fund had pledged as collateral.

In addition to large losses for investors and lenders to the Bear Stearns fund, some analysts feared that a failure of the fund could accelerate losses in the subprime mortgage-backed securities market and perhaps trigger a loss of confidence in the wider market for complex structured finance securities.

That, in turn, could lead to heavy selling and losses for investors, including Wall Street banks that hold some debt instruments before they are packaged and sold to investors. The Bear Stearns fund, which raised $600m from investors and borrowed at least $6bn more, presented a rescue plan on Tuesday to Merrill and other creditors.

Under the plan, banks such as Citigroup and Barclays Capital would have invested $500m in equity capital to help the fund meet margin calls. Bear Stearns itself, which has little direct exposure to the fund, would have put up $1.5bn on a fully collateralised basis.

The plan, presented by advisers from Blackstone, the buy-out firm, would also have required creditors not to make margin calls for 12 months.

Merrill rejected the plan, in part, because of the 12 month requirement, people close to the matter said. Merrill late on Tuesday circulated a list of assets it planned to sell to potential group of investors thought to include firms such as Fortress and Citadel.

Merrill’s rejection could lead other creditors to seize and sell collateral held by the fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage fund. That would mean the fund would likely be forced to liquidate remaining assets to repay creditors and investors.

The remaining assets left for the fund to sell could be riskier and harder to price securities, which might have to be sold at significant losses if dumped in a hurry.

The Bear fund’s bets went bad amid turmoil in the subprime mortgage market, leading to a 23 per cent drop in its value. A companion $1bn Bear Stearns mortgage backed securities fund has fallen about 5 per cent, according to people close to the matter.

 

[Lucky]

addendum

Bear Stearns Fund Collapse Sends Shock Through CDOs (Update2)
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahWfhEJ7dra4

June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.
...
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

Shares of Bear Stearns, the fifth-biggest U.S. securities firm by market value, and Merrill, the third-largest, led a decline in financial company stocks yesterday, and the perceived risk of owning their bonds jumped on concerns losses related to subprime home loans may be bigger than initially thought. Both companies are based in New York.
...
``We're not surprised to find the principal circle of players is pretty interconnected,'' said Roy Smith, professor of finance at New York University Stern School of Business and former head of Goldman's London office. ``What we're looking for is whether the interconnection creates a negative domino effect: Whether Hedge Fund A creates a problem for other hedge funds, which in turn creates a problem for the prime brokers that are lending to them.''

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Merrill Sells Portion of $850 Million Bear Funds (Update4)
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a41ZmDYVd.sg

June 21 (Bloomberg) -- Merrill Lynch & Co. backed away from a threat to dump about $850 million of securities it seized from Bear Stearns Cos. hedge funds, according to people with knowledge of the firm's plans.

Merrill sold a small portion of the collateralized debt obligations through its auction, said the people, who declined to be identified because the details haven't been announced.

As Merrill stepped out, Lehman Brothers Holdings Inc., also a creditor, began offering assets for sale that serve as collateral for its loans to the funds, according to a person with knowledge of the firm's plans. The person declined to say how much the assets were worth. Merrill's decision, and the scrapping of a sale yesterday by JPMorgan Chase & Co., had eased concerns that a large amount of securities would be liquidated immediately.

The securities firms set their sale in motion to reclaim loans to the two hedge funds, which had posted losses of as much as 20 percent by betting on CDOs. A large sale may help confirm that other funds are overvaluing their holdings of similar securities, potentially causing a chain reaction of writedowns causing billions in losses.

``It's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''

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Bear Stearns May Take on $3.2 Billion of Fund Loans, People Say
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aq1AgBoZS7Ws

June 21 (Bloomberg) -- Bear Stearns Cos. may take over about $3.2 billion of loans that banks and securities firms made to one of its money-losing hedge funds to prevent creditors from seizing more assets, according to people with knowledge of the plan.

Bear Stearns, the biggest broker to hedge funds, offered to assume the loans after Merrill Lynch & Co. took assets that backed $850 million in credit lines, said the people, who declined to be named because the proposal is confidential. Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. also put some of their collateral up for sale.

An agreement between the creditors and New York-based Bear Stearns, the second-biggest underwriter of mortgage bonds, may avert a fire sale of the fund's assets. Bear Stearns has spent the past few days attempting to rescue the two hedge funds after they made bad bets on so-called collateralized-debt obligations, securities backed by bonds, loans and derivatives.


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House of cards? Or in favour of the house?

 

[Lucky]

Bear 'likely to bail out second fund'

http://www.theage.com.au/news/Busin...out-second-fund/2007/06/26/1182623861314.html

Bear Stearns Cos Inc may have to bail out a second troubled hedge fund that it manages, a Merrill Lynch analyst wrote on Monday.

That fund could have a loan exposure of as much as $US7 billion ($A8.26 billion), Guy Moszkowski wrote.
...
That fund, the High-Grade Structured Credit Enhanced Leverage Fund, was down about 23 per cent through April 30.

It is possible that because the Enhanced Leverage fund was known to be riskier from the start, that lenders would be less likely to expect a bailout, Moszkowski wrote.

"But it's not yet clear that the firm won't ultimately feel the need to provide support here as well," he added.

Lenders have exposure of around $US7 billion ($A8.26 billion) to the Enhanced Leverage fund, given the fact that the two funds had somewhere around $US10 billion ($A11.81 billion) of combined repo borrowings, Moszkowski wrote.