Regular HW readers know two troubled subprime hedge funds at Wall Street investment firm Bear Stearns faced a reckoning of sorts today, as numerous investors had planned to auction off siezed fund assets. The Wall Street Journal is reporting that Merrill Lynch’s well-publicized auction went off as planned — with some of the higher-quality assets involved in the sale apparently fetching more than expected — but that JP Morgan pulled back minutes before a scheduled start and later came to terms with Bear Stearns:
J.P. Morgan Chase & Co., lender to Bear’s hedge funds, was scheduled to begin an afternoon auction of collateral it held from the bear fund, mainly mortgage-backed debt. Minutes before the sales were to begin, the firm pulled back. Later, J.P. Morgan came to terms with Bear to eliminate its exposure to Bear’s troubled hedge funds, said a person briefed on the matter. Some traders said the bank might have been forced to settle with Bear because the loans it had put up for sale would have fetched so little in the market. Deutsche Bank AG and Merrill Lynch & Co., among others, remained in limbo, said people briefed on those talks…. Merrill also planned to sell collateral and stopped negotiating with Bear, according to a person familiar with the matter. Due to the mortgage market’s restless state, some of the early prices bandied about for Merrill’s assets were relatively low. But when Merrill’s auction took place late in the afternoon, it managed to sell some higher-quality assets at reasonably high prices, according to an investor familiar with the auction.
Analysts and traders interviewed in the WSJ story are holding fast to the story that the hedge fund troubles at Bear Stearns are unlikely to have broader market impact. Nonetheless, the fear is there:
“We’re waiting to see if [Bear Stearns’ troubles] will be repeated” elsewhere, said David Ader, head of government bond strategy at RBS Greenwich Capital. If signals of distress start showing up at more hedge funds, it “has the power to stress [risk premiums] and put a bid in the [Treasurys] market,” Mr. Ader added.
I’ve gotten plenty of emails today asking one question: why did Merrill force the issue here when nearly everyone else appears to have settled behind closed doors? I know that I don’t have a firm answer here, although I do have an unfounded theory I won’t share in this space. The only answer I’ll provide is that Merrill surely had its reasons — read into that what you will.