Continued Fun at Bear Stearns & Related News / Opinions

[TJ_98370]

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Bear Stearns pay their executives millions in bonuses and then later claim they do not have the necessary liquidity for redemptions of a subprime mortgage backed hedge fund;


Feb 21 2006


Hit by the subprime market's collapse, investors in a highly leveraged—and losing—hedge fund find they can't get out


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Related Seattle Bubble Forum Thread --
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[biliruben]

Same old, same old.

The scum vote themselves raises after demonstrating their incompetence.

That's capitalism for you.

[TJ_98370]

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A highly leveraged Bear Stearns hedge fund that made bad bets on the subprime mortgage market was on the brink of failure on Tuesday after Merrill Lynch rejected a proposed rescue plan and prepared to auction off $850m of assets that the fund had pledged as collateral.

In addition to large losses for investors and lenders to the Bear Stearns fund, some analysts feared that a failure of the fund could accelerate losses in the subprime mortgage-backed securities market and perhaps trigger a loss of confidence in the wider market for complex structured finance securities.

That, in turn, could lead to heavy selling and losses for investors, including Wall Street banks that hold some debt instruments before they are packaged and sold to investors.
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[TJ_98370]

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June 20 (Bloomberg) -- Bear Stearns Cos.'s attempt to rescue its money-losing hedge funds may falter after creditor Merrill Lynch & Co. decided to seize and sell $800 million of bonds held as collateral for loans to the funds.....

....The 10-month-old High-Grade Structured Credit Strategies Enhanced Leverage Fund, run by Bear Stearns senior managing director Ralph Cioffi, has lost about 20 percent this year. The fund and a sister fund called the High-Grade Structured Credit Strategies Fund, which hadn't borrowed as much and was down less, both have faced pressure from creditors. They specialized in mortgage bonds and so-called collateralized debt obligations backed by home-loan bonds and other assets.

``The real fear has to do with just how many other funds and warehouses could be in trouble,'' said Jeremy Shor, who oversees about $3 billion in asset-backed bonds as a portfolio manager at Brown Brothers Harriman & Co. in New York. A warehouse is a credit line extended to CDO managers to buy the assets that they plan to repackage into new securities.

A slump in the U.S. housing market is leading to rising delinquencies on home loans, especially so-called subprime mortgages, made to homebuyers with poor credit or heavy debt loads. That's pushing down the value of related securities. The fallout has forced lenders such as New Century Financial Corp into bankruptcy, and caused the closure or sale of dozens more.

Bondholders at Risk

As defaults rise, bondholders stand to lose as much as $75 billion of subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts....

[TJ_98370]

Good coverage on Bear Stearns (and others) subprime mortgage troubles in Ben Jones The Housing Bubble Blog June 21 article . The comments to this article are also worth reading IMO.

....."One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road."....

...."'I wouldn't be at all surprised if we hear about more [hedge funds] blowing up in the coming months, as the subprime market meltdown continues,' he said. "You've got $250 billion of subprime [adjustable-rate mortgages] that are going to reset this year.'"...
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[Eleua]

[Eleua]

[Eleua]

[TJ_98370]

Yes, it would seem that these CDO's would have to be heavily discounted now to make them semi-palatable to any would-be buyer.

I'm no financial wizard, but I sense that something dramatic is going to result from this due to the severe leveraging. It could be a predictor of things to come....

Two of my favorite, more relevant comments from The HBB regarding Bear Stearns' troubles:

About the auction:

Comment by KIA
2007-06-21 14:36:33

I think it more likely that there is a high degree of cherry-picking going on as the would-be purchasers finally start scrutinizing which loan packages might generate some kind of positive return versus which loan packages are sheer toxic waste which is guaranteed to suffer further losses. The percentages revealed by this auction should be a five-alarm warning for the industry.

About the situation in general:

Comment by palmetto
2007-06-21 10:32:58

"one of the most important takeaways here could be the culpability of the ratings agencies in all this."

Interesting housing bubble parallel between ratings agencies and real estate appraisers, IMHO. I just love the blame game and all the finger pointing. The truth is, everything has been so gamed, so blurred, so submerged, nobody knows WTF, anywhere.

A little sunshine is the best disinfectant.

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[TJ_98370]

NEW YORK, June 22 (Reuters) - Bear Stearns Cos. Inc. on Friday said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, but sources said a second fund is still working out a restructuring plan with creditors.

The bailout sent financial markets into a tizzy, spurring investors to sell shares, particularly of investment and commercial banks, and buy safer Treasuries.

"People are extremely nervous about this issue, so it's sell first, ask questions later," said Stephen Massocca, co-chief executive of San Francisco-based investment bank Pacific Growth Equities. "People are concerned that this is a contagion that could spread elsewhere."



NEW YORK, June 22 (Reuters) - Bear Stearns Cos. Inc. said on Friday it is confident that the value of the collateral for its up to $3.2 billion loan to a hedge fund is greater than the value of the loan.

That means the investment bank's exposure to the fund that it manages, the Bear Stearns High-Grade Structured Credit Fund, is relatively low.

Bear Stearns is still trying to restructure the Bear Stearns High Grade Structured Credit Enhanced Leveraged Fund, and that could take several months, said Bear Chief Financial Officer Sam Molinaro.

But so far, all parties that have threatened to sell assets seized from the fund have not done so, Molinaro said. There are not additional Bear Stearns managed funds with similar market exposure, he added.

Perhaps seized assets from the fund haven't sold because no-one will buy these CDO's at an "acceptable" price as they are now considered too risky?..
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[TJ_98370]

...NEW YORK, June 22 (Reuters) - Fitch Ratings said on Friday its ratings on Bear Stearns Cos. are unaffected by the bank's decision to provide $3.2 billion in secured financing to a troubled hedge fund at its asset management arm, Bear Stearns Asset Management....

....Fitch has an issuer default rating on Bear Stearns of "A-plus," the fifth highest investment grade ranking....



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[TJ_98370]

Good stuff from Ben Jones' Blog once again -

[url=http://thehousingbubbleblog.com/?p=2992]An Open-Ended Black Hole
[/url]

...From Bloomberg. "Losses in the U.S. mortgage market may be the 'tip of the iceberg' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said."...

..."'The large volume of subprime ARMs scheduled to reset at higher rates in '07 and '08 will pressure already stretched borrowers,' forcing more loans into foreclosure, the Bank of America analysts wrote from New York. A collapse of the Bear Stearns funds 'could be the tipping point of a broader fallout from subprime mortgage credit deterioration,' they said."...

...Bear Stearns Cos. is proposing a bailout of a money-losing hedge fund by taking on $3.2 billion of loans to forestall creditors from seizing assets, the biggest rescue since 1998, people with knowledge of the plan said."...

..."Bear Stearns, the second-biggest underwriter of mortgage bonds, increased efforts to salvage the fund, one of two that made bad bets on collateralized-debt obligations."...

Mr. Joseph Mason notes how there is no transparency with CDO's...

..."'The problem is not what we see happening, but what we don't see,' said Joseph Mason, associate professor of finance at Drexel University in Philadelphia and co-author of an 84-page study this year on the CDO market. 'We don't know the price of these assets. We don't know which banks are exposed to this sector. These conditions are the classic conditions for financial crises across history.'"...

..."The first CDOs were created at now-defunct Drexel Burnham Lambert Inc. in 1987. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service."...

..."CDOs may have lost as much as $25 billion because of subprime defaults, Lehman Brothers analysts estimated in April."...

..."Bear Stearns's proposal doesn't involve taking equity. Instead, the firm would become a lender to the fund, its loan secured by the assets of the fund."...


Interesting comment about who is buying subprime debt and why..

Comment by txchick57
2007-06-22 09:44:39

This will make you laugh or cry, depending on your prediliction:

Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Who's Buying Subprime Now?

As problems at two Bear Stearns hedge funds have Wall Street mortgage desks scrambling to offload subprime debt to bids as low as 30 cents on the dollar, the question now is who is buying what they're selling? Why, the usual suspects of course: university endowments. Seriously.

According to the Wall Street Journal, university endowments are stepping up as buyers of subprime debt.

"There's an opportunity out there to buy these loans at a discount," Lou Morrell, vice president for investments and treasurer at Wake Forest University told the Journal.

Wake Forest's $1.2 billion endowment is in the process of placing about $25 million with a hedge fund to invest in subprime mortgages, the newspaper reported.

Because subprime loans could sell for steep discounts, "they will be popular with a lot of endowments out there," Morrell said.

Wake Forest isn't alone. Vanderbilt University has earmarked $50 million to invest in debt backed by subprime mortgages.

Bill Spitz, chief investment officer for the $3.4 billion endowment at Vanderbilt, says he has no expertise in the mortgage market, but is placing money with a new fund from Trust Company of the West as part of Vanderbilt's strategy of putting as much as 5% of the fund's assets into "opportunistic" investments they hope can boost returns, the Journal said.
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[TJ_98370]

Jim Cramer shares his opinion about the Bear Stearns hedge fund troubles:



Lever up and mismark, a toxic combination. That's my understanding of what happened at Bear Stearns' hedge funds. And I believe there will be no fallout whatsoever beyond the funds, despite the innate desire by so many people to rumor and panic the marketplace....
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Time will tell whether he is right or not...
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[sniglet]

[Jazen]