Bear Stearns' Fund on the Brink

[HenryTo]

Merrill's choice not to wait may cause some dislocation in various part of the mortage market next week. Following article is courtesy of the WSJ:
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A 'Subprime' Fund Is on the Brink
By KATE KELLY
June 16, 2007; Page B1

Concerned that an internal hedge fund at Bear Stearns Cos. wouldn't be able to meet a margin call, Merrill Lynch & Co., one of the fund's biggest lenders, seized $400 million of its assets and is preparing to auction them off.

The auction, in the coming week, could trigger the fund's dissolution -- the second blowup in recent months of a hedge fund that made dicey bets on the market for risky home loans, known as subprime mortgages.

The surprise move involving the two Wall Street firms came as the Bear fund's managers, led by bond-sales veteran Ralph Cioffi, scrambled Thursday and Friday to sell hundreds of millions of dollars in bonds to satisfy demands for cash and assets from creditors and stave off liquidation. Mr. Cioffi's group had successfully auctioned off almost $4 billion in high-quality mortgage bonds Thursday morning. Later that afternoon at Bear's New York offices, the fund managers presented lenders with a 30-day plan for selling more assets, a blueprint for meeting new margin calls that appeared to have been well-received.

Merrill opted not to wait. Friday afternoon, the firm's bond traders began circulating a list of securities that had served as collateral, or security, for the credit it had extended to the Bear fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund.

Bids for the securities are scheduled to be negotiated starting at noon on Monday.

The seizure by Merrill -- which could spur other lenders to seize fund assets -- may well mean the end of Mr. Cioffi's two funds.

The Bear fund has different bets on the health of subprime mortgages, both positive and negative, but has been hurt particularly by a negative bet after a rebound on a key index that tracks the sector.

In the earlier blowup, in May, UBS AG shut down Dillon Read Capital Management after bad trades in subprime-mortgage loans led to a $124 million loss.

The latest auctions have been watched closely by Wall Street. Especially concerned are other hedge funds that may be forced to lower the value of their own assets if the Bear sale fetches bids that are well below what the fund says they are worth. Unlike the high-quality and liquid mortgage-backed bonds that Bear sold this past week, the assets up for sale this time comprise securities that are considerably less liquid.

Mr. Cioffi's 30-day plan was a last-ditch effort to salvage his fund, which he has run since August and is geared to sophisticated investors. Built on about $600 million in investor capital, $40 million of which came from Bear and a group of firm executives, the fund had borrowed at least $6 billion in additional capital from a dozen Wall Street lenders, say people familiar with the matter, including Merrill, Goldman Sachs Group Inc., Bank of America Corp. and Deutsche Bank AG. It was run by Bear executives alongside a larger sister fund with relatively little borrowed capital.

The fund bet a popular index that tracks subprime mortgages, the ABX, would fall. Late last year and early this year, those moves bore good returns, says a person familiar with the matter. Then the tide began to turn. After reaching a low of 62 late in February, amid rising numbers of defaults and delinquencies in the subprime market, the ABX unexpectedly recovered in the months that followed, reaching 72 in mid-May. It has since gone back down to 61. This led to losses for Mr. Cioffi.

Mr. Cioffi's team also bet collateralized debt obligations, or pools of mortgage-backed bonds, would keep their value. But some of them fell in value, leading to further losses.

During April, the leveraged fund began falling sharply. Its bearish bets on subprime securities had created paper losses, and some investors were getting antsy and asking to redeem their cash, says a person familiar with the matter. After getting wind of the redemption requests, some of the firms that had sold subprime securities to the fund asked to revalue them at a lower level, says this person. By the end of the month, the leveraged fund had fallen 23% for the year.

Mr. Cioffi's team froze the redemption requests, hoping to stabilize the fund, and began selling off billions of dollars in its most valuable assets from both the leveraged and the less-risky funds. From the beginning of May through Thursday, the Bear funds had sold roughly $7 billion in assets, says a person familiar with the matter. Friday, the fund began auctioning hundreds of millions more. As this was under way, Merrill moved in and seized assets in an attempt to protect its investment.

--Serena Ng contributed to this article.

Write to Kate Kelly at kate.kelly@wsj.com

[rffrydr]

As romoured, Chinese to the rescue...sorta:

http://www.marketwatch.com/news/story/bear-stearns-chinas-citic-invest/story.aspx?guid=%7BA14742B5%2D8FDE%2D4DD5%2DA0E4%2D54A97BA6BCA0%7D
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Maybe that's why this stakeholder came in:

http://www.cnbc.com/id/15840232?video=509224589&play=1

LEH kicking it off on tues.; with Fed Day. Should be interesting.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Bear Stearns 10-yr bond trades at a discount to Columbia, South America.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Romour of Chinese buyout of Bear Stears today
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

BSC Holding Aug 6th lows.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Losses on Basis Capital's fund now approaching 80%:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.x1HU3pEazQ&refer=home

[HenryTo]

Third Bear Stearns fund facing losses. BSC down another 4% in after-hours trading:

http://money.cnn.com/2007/07/31/news/companies/bear_stearns/index.htm?source=yahoo_quote

[rffrydr]

Same deal here:


FT
SECTION: MARKETS AND INVESTING; Pg. 35

LENGTH: 373 words

HEADLINE: Basis investors warned of likely losses over stricken hedge fund

BYLINE: By JAMES MACKINTOSH

BODY:


Basis Capital has warned investors in a stricken hedge fund run by the Australian manager that they may lose more than half their money if banks continue to sell assets seized from the fund.

Basis, which has about Dollars 1bn under management, told investors this week that banks had taken control of collateral used to back loans to the Yield Fund after it failed to meet margin calls. The fund lost close to 14 per cent in June as investments in structured credit were hammered by the crisis in US subprime mortgages.

But it is negotiating with the banks in an effort to avoid a fire-sale, it told investors, and has appointed accountants Grant Thornton to help, as reported in yesterday's Financial Times.

"As there is no liquid market for many of these investments there is a serious risk of substantial losses . . . as the prices obtained by financiers may be significantly below the book value," Basis said in a statement e-mailed to investors.

If the banks sold off the assets it could lose more than half the value as of the end of May.

Basis also warned investors in its other main fund, the Pac-Rim Opportunity fund, that it held a Dollars 79.8m stake in the Yield fund. But they said the Pac-Rim fund had more than half its investments in liquid bonds, and that it had not missed any margin calls.

The troubles at Basis follow the near-collapse of two highly leveraged Bear Stearns hedge funds after heavy losses on subprime-related investments.

Two other hedge funds, London-listed Caliber, run by Cambridge Place Investment Management, and Galena Street, run by Denver-based Braddock Financial, have announced plans to shut down and return money to investors. Other funds have been hit by the fallout, including some run by Florida-based United Capital Markets, which have suspended redemptions.

The Basis Pac-Rim fund is part of the Credit Suisse/Tremont benchmark hedge fund index, used by the Swiss bank to support index tracking derivatives. But, as with the less-leveraged of the two troubled Bear funds, also in the index, it had a very low weighting.

Neither Basis fund was in the CS/Tremont Fixed Income Arbitrage sector invest index, a specialist index, which lost more than 8 per cent last week by its exposure to the Bear fund.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Bear Stearns to be sued. No surprises here, as BSC closed at another multi-month low today:
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Bear Stearns to be sued over subprime funds: CNBC
Friday July 20, 10:54 pm ET

NEW YORK (Reuters) - Investors in Bear Stearns Cos. (NYSE:BSC - News) hedge funds that were virtually wiped out from large bets on risky mortgages are planning to sue the company as early as Monday, television channel CNBC reported on Friday.

The lawsuit will be brought by the firm of Bernstein Litowitz Berger and Grossman LLP, which represented investors against WorldCom Inc. over a massive accounting fraud, CNBC said.

According to CNBC, the lawsuit will allege Bear Stearns made material misrepresentations in offering documents, misrepresented risks of the hedge funds in those documents, and misrepresented its ability to control those risks.

An official at Bernstein Litowitz told Reuters the firm was contacted by some investors who were seeking their advice.

Officials at Bear Stearns did not immediately return requests for comment.

Legal experts have said the losses in the Bear funds are so large that litigation is almost inevitable.

But they say plaintiffs could have a tough time proving their case. Because the funds were aimed at sophisticated investors such as institutions and wealthy clients, it could be hard to argue that the risks were not properly understood.

[rffrydr]

And, in case you haven't had enough, straight form the horses mouth:

http://ftalphaville.ft.com/blog/2007/07/18/5971/a-short-five-months-for-bear-stearns-investors/


Key here is leverage. My interest is their "margin." Was this less than 10% or greater than 50%. There's implications to those numbers.

Businessweek quote:

[nodoodahs]

Speaking of Bear Sterns (BSC), they seem to be holding above last week's low ...
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[rffrydr]

I've been burned more than once--and it is the leverage. And will again, but will try to limit it again. Can't trade grains in Summer without offseting some drought risk. Can't trade oil into hurricane season without some hedge. Buy the OFTM option. Speading on an "abstract" BTU equivilant AKA NatGas for instance doesn't cut it.

Trying to "play it safe" in an ineherently dangerous game should be looked at long and hard. And this goes far beyound the markets, into our social even family models. Thinking you HAVE played it safe and leveraging up, that's a mug's game.

Turns out BS's "high-grade" really was: all AAA and Alt-A:

http://www.bloomberg.com/apps/news?pid=20601087&sid=ao3.vbiiZJZM&refer=home

Once again, metaphor is the mechanism: the broad brush tarring the media (we) wanted tell became the reality.
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Amaranth was a spread deal, too.

I'm convinced that whatever "higher math" has been used to convince all of these funds that spread plays are "low risk" should be dumped in favor of high school (well, mid- to early-20th-century high school) algebra.
_________________
He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[rffrydr]

[nodoodahs]

"Contagion?" Could it be any more clear that "subprime" is this year's "bird flu?"
_________________
He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.