Bear Stearns Hedge Funds Nearly Worthless

Bear Stearns told investors Tuesday that the more leveraged of its collapsing hedge funds has "effectively no value left" and the less leveraged "very little." The WSJ estimates losses at the less leveraged fund at more than 90%. The company's shares fell 3.6% to $134.90 in AH trading following the news. The funds, which had over $20 billion in investments at their peak, were heavily invested in CDOs, pooled debt securities backed by subprime mortgages. CDOs are highly illiquid and difficult to value. As defaults on subprime loans surged, the funds' creditors made margin calls they were unable to meet. The subsequent collapse of the funds brought with it the prospect of an across-the-board repricing of CDOs. The potential fallout at similarly exposed funds will be easier to evaluate now that the market has information on how Bear priced its funds' assets. The effects of abrupt repricing are already being felt elsewhere: funds managed by Australian hedge fund manager Basis Capital have been put up for sale after sharp declines that Basis attributes to sudden markdowns in the value of underlying securities that were "otherwise fundamentally sound." Hedge fund consultant Charles Gradante: "Right now things are starting to come unglued."

Sources: Bear Stearns letter to clients [pdf], Wall Street Journal, MarketWatch, TheStreet.com, Financial Times
Commentary: The Financial Cancer Spreading Through the Credit Markets: Subprime Not Contained • Concussions... Now The Repercussions: Hedge Funds Report Monday • Subprime-Exposed Hedge Fund Investors Behind The Gates of Hell • Bear Stearns Hedge Fund Investors Must Wait to Learn Losses
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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Comments

[Long-Short Guy:]

Perhaps not as bad as it seemed at the time:
<blockquote>
<b>Bear Stearns Shares Show Cayne's Dummy `Body Blow' Won't Hurt</b>

When Bear Stearns Cos. Chief Executive Officer James E. ``Jimmy'' Cayne told the New York Times the failure of the firm's hedge funds was a ``body blow of massive proportion,'' he may have been using a tactic honed in three decades of championship bridge.

To win the card game, a player sometimes will misstate the number of tricks he can win to dupe opponents into underestimating his hand. So far, Bear Stearns shareholders aren't showing much anxiety. The stock has outperformed its peers since Cayne's remarks were published on June 29, even after Bear Stearns told investors in the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leverage funds that almost all of their money was wiped out...
</blockquote>

Source:
www.bloomberg.com/apps...;sid=aLfvGsmPqM.A

2007 Jul 23 01:35 AM