SEC Knocking on Bear Stearns' Door

The SEC has opened a preliminary investigation into the near collapse of the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, according to Business Week [BW]. No subpoenas have been issued so far. On May 15, Bear said the fund, which is invested primarily in securities backed by subprime mortgages, lost 6.5% in April. On June 7, however, Bear restated the April loss -- without explanation -- to 18.97%, or 23% for the year. The SEC is probing the reasons for this restatement. BW says Bear is privately blaming its creditor banks, which it says began demanding additional collateral. The banks allegedly started marking down the value of the subprime bonds in which the fund is invested, setting off the collapse. Several creditors have threatened to seize the fund's assets and sell them, though the steep discount they would fetch on the open market has deterred most of them. Traders say there is probably more involved than the creditors' actions: Bear itself may have had to reprice some of its subprime-backed securities after liquidating assets, and its "optimistic" pricing model may have attracted the attention of auditors. In related news, Bear has halved the amount it will put up to rescue the less leveraged of its two ailing funds after buyers were found for some assets, reducing its potential exposure to $1.6 billion. Shares closed down 3.23% at $139.10.

Sources: Business Week I, II [video], TheStreet.com, Bloomberg
Commentary: Bear Stearns Attempting $3.2 Billion Hedge Fund Rescue • Bear Stearns Hedge Fund Collapse: Dress Rehearsal For Something Much Scarier? • Why The Market Was Spooked By Bear Stearns Friday
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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