In what some observers are calling an ominous sign for the mortgage-backed bond market, a hedge fund run by investment bank Bear Stearns is racing to sell large quantities of those securities, according to the Wall Street Journal. Many of the bonds in question are backed by subprime mortgages. The bank's High-Grade Structured Credit Strategies Enhanced Leverage Fund, together with a sister fund, is facing serious losses and probable margin calls. The fund is trying to raise cash by selling approximately $4 billion in mortgage-backed bonds, valued individually between $1 million and almost $110 million. If the sale fails, the fund might be shut down. The amount to be sold represents a small portion of the $7 trillion residential mortgage-backed bond market, but it is a great deal to be sold at one time. Bids for the bonds are due at 10:00 a.m. Thursday, the same day Bear Stearns will post quarterly results. Analysts are forecasting a 6% drop in fiscal Q2 earnings from a year ago, in part because of the bank's exposure to mortgage-backed bonds. Last month, Swiss bank UBS AG shut down internal hedge fund Dillon Read Capital Management after bad mortgage trades led to a $124 million loss.
Sources: Wall Street Journal, Reuters
Commentary: I-Banks At Risk From Hedge Fund Over-Exposure? • Bear Stearns' Profits Rise 8% Despite Housing Slowdown • Bear Stearns Criticized For Helping Delinquent Subprime Borrowers
Stocks/ETFs to watch: Bear Stearns Companies Inc. (BSC). Competitors: Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH), Merrill Lynch & Co. Inc. (MER). ETFs: iShares Dow Jones US Broker-Dealers (IAI), KBW Capital Markets ETF (KCE)
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