According to a Bloomberg report, Bear Stearns looks like it may assume $3.2 billion in collateral on one of its two troubled hedge funds, both of which have lost value as a part of the mortgage bond market has tanked in recent days. Bloomberg reports:
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. “For the sake of its reputation, Bear needs to put this behind it as soon as possible,” said Peter Goldman, who helps manage $600 million at Chicago Asset Management, including shares of Bear Stearns. “The firm might take on some of the risk of the fund they didn’t have before, but they’re a bond shop and they wouldn’t take on risk they shouldn’t.”
You’ve got to love that quote by Peter Goldman. Bear Stearns, taking on risk it shouldn’t? They wouldn’t ever do that, would they? It also looks like Bear is trying to save the fund that is less underwater at this point, according to the same Bloomberg story:
Bear Stearns’s [sic] is making the offer on the High-Grade Structured Credit Strategies Fund, which lost less than 10 percent this year. A second fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, lost about 20 percent.
Earlier stories had pegged a Bear Stearns offer to recapitalize the Enhanced Leverage Fund at $1.5 billion, an offer that apparently has since fizzled — although I’ve seen little in the press on the fate of this fund. In fact, many of the press reports I’ve seen covering this soap opera tend to mangle the two funds together indiscriminately — probably partly because of the absolute dearth of information coming from the Street itself on this. Apparently, we’ll have to keep putting the puzzle together piece by piece. It appears to me that so far a few assets were sold out of both of the funds, some by Merrill and some by Lehman and JPMorgan — which might explain why Merrill’s redemptions magically jumped up to $850 million in press reports (earlier reports likely were covering liquidation from just one fund). It also appears at this point that only some of those assets fetched prices worth selling at (likely AAA, and some AA), while the rest (mezzanine and equity tranches) fetched bids so low that Merrill — and others like them — were forced to rethink their game plans. I can’t help but be reminded here of the old saying about cutting off your ear to spite your face. Update: The Financial Times covers this in a bit more depth. Bear is apparently proposing to serve as counterparty to $3.2 million in repurchase agreements, if the banks agree not to auction off collateral held in the fund for 90 days. Update: A reader sent in a link to a well-written summary at the Economist on all of this, although the story focuses on only one of the two troubled funds.
