Bear Stearns, The Subprime Flu, and What Lies Ahead
As the carnage at Bear Stearns continues to quietly build up - the company somewhat quietly relieved Ralph Cioffi of his day-to-day duties managing two now-infamous hedge funds -- the Wall Street Journal noted on Saturday that the investment bank has also ousted the head of its money-management unit as well:
Bear named Jeffrey Lane, a veteran Wall Street executive who once ran money manager Neuberger Berman LLC, as chairman and chief executive of Bear Stearns Asset Management. Mr. Lane ... succeeds Richard Marin ... who was tasked with building Bear's money-management business. Mr. Marin had a productive run .. [b]ut it was also on Mr. Marin's watch that a Bear hedge fund took on far more borrowed capital than it could ultimately manage, making overly shaky bets on risky mortgages.The Journal also had a nearly-damning look at the larger issue of how the current "subprime flu" in the bond markets is turning the spotlight on hedge fund valuation strategies, citing a study that found that "roughly 30% of hedge funds that invest in illiquid securities smooth out returns with price estimates for these securities that are potentially self-serving." The obvious implication, according to the story, "is that these funds aren't using market prices to adjust holdings' values." And its precisely this mark-to-our-market strategy, according to another Journal story, that suggests it may not be until the middle of July until investors really know just how much money they've lost on the two Bear Stearns funds we've been discussing:
The Wall Street firm has had difficulty calculating the funds' fair value ... "In light of the Funds' circumstances, this process is more time-consuming than in prior periods," Bear's asset-management arm said in a "Dear Investor" letter dated Friday. It told investors that net asset values as of May 31 would be calculated "on or before July 16," and that it would make its best effort to calculate an estimate of the June 30 value of the two funds by the same time. It "has determined not to release an estimated NAV in the interim," Bear Stearns Asset Management Inc. said in the letter.Not that I'm at all privy to the company's motives here (because I'm not), but if I were managing either of the funds in question, you can be damn sure I'd want the extra time to be able to mark to whatever asset value had the most (ahem) investor utility. It's also possible, as Bear Stearns looks to 'mark-to-Marano' (hat tip, Tanta), that the newly-appointed sheriff in town needs some time to figure just what he's looking at. Either way, I'd have to think there's a rough road ahead; the only question at this point is what actions -- if any -- are in the works at any of the Big Three rating agencies. Update: Highlighting that rough road I mentioned earlier, the Financial Times takes on the two-headed beast of liquidity and collateral risk.