The assets in Bear's more levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the other larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said
It says very little value is left for the investors - principal in the funds was about $900 million, which was levered up 6-10x with debt.
So is it 9 cents on the dollar for principal, or the entire levered amount?
I'm seeing people commenting on this as if it was the latter - I think its the former.
anyone know for sure?
to answer my own question - based on this article from bloomberg, it's pretty clearly the former. So $600 million in one fund and ~$800million in the other. The "Ehnanced Leverage Fund" was levered 20x - so this means they lost all of their net investment - based on only about 5% of their gross exposure. So in other words - the value of the bonds went down ~5% and that wiped out the fund. That's a long way from saying all the bonds they invested in are worthless. Actually, they are worth 95% of what they bought them for. unfortunately - they need to pay that amount back to their lenders...
It seems to me that the problem here was the leverage as much or more than the instruments in which they invested. Somebody should be fired, but the doom and gloom posts are a bit OTT imho
Borrowed Money
The fund that now has nothing left for investors, the High- Grade Structured Credit Strategies Enhanced Leverage Fund, had $638 million of capital as of March 31, according to performance reports sent to clients at the time. The second fund, called the High-Grade Structured Credit Strategies Fund, had $925 million.
Both funds made leveraged bets in an effort to boost returns. The enhanced fund borrowed about $11 billion, or almost 20 times its capital. Its sister fund, the one Bear Stearns bailed out last month, borrowed almost $9 billion.
That second fund has lost about 91 percent of its value this year, according to a person with direct knowledge of its performance who declined to be identified because the figures aren't public.
``During June, the funds experienced significant declines in the value of their assets resulting in a loss of net asset value,'' Bear Stearns said in today's letter. ``In light of these returns, we will seek an orderly wind-down of the funds over time.''
The end is coming...
I seriously don't see the worry in the market though, it's like they don't care.
Weird. I would think this has massive implications for the economy as a whole.
I'm sorry, but is there something wrong with my math here?
Total amount invested by fund A: ~$11.5B Percent rumored to be lost in internet blogs including this one: 70% ("can't sell for 30 cents on the dollar" - check the beginning of this thread) Implied loss: $8 billion Actual loss: $600 million Multiple by which internet rumor-mongering overstated the impact: 13X
So now we see the extent of the debacle, and you are acting like its the end of the world, when the actual impact was oh, lets see - 7.5% of what was thrown out earlier?
Is it just me, or have you all completely lost perspective? If Jim Cramer turned bearish, I now know what he would sound like.
It depends on how much leverage the fund had. If they were levered up 13X, the numbers would make sense.
There is more to this story to come.
Once the BSC hedge funds mark to market, all the other funds out there in CDO land will have to do the same. This may cause a cascading default or liquidation across the industry.
What is important isn't the amount lost by BSC, but that the CDOs being marked to a theoretical model era has come to an end.
They will have to mark to a market, which will be much more problematic during a down cycle in housing.
Example:
If everyone in Ballard had their retirement dreams held in the prices of the homes there, and everyone agreed that Ballard homes are all worth $1M each, then they can all act like they have a cool $1M ready for their golden years. Suddenly, the bank that is holding the note for some crazy musician decides they have too much risk and try to foreclose/call the loan, they have to sell the house. If the house only gets a bid of $600K, and the bank was on the hook for $800K, the musician loses 100% and the bank loses 25%. No big deal in the big picture.
The stink comes from all the other banks that have notes in Ballard. They just looked at 'shugy's house and hit the panic button. Now, they don't want to continue to fund homes in Ballard at the $1M price. They will only fund at the $600K price, but if there is a stampede, then they can only fund at $250K.
Can you see the problem here?
Mark to model was institutional fraud. Those days are over, but they were responsible for the enormous tidal wave of liquidity that fueled this madness to begin with. With that over, the contraction will continue and that will make the mark to market even worse.
The excitement over the BSC funds is very, very justified.
Lastly, we don't know the extent of the immediate damage to BSC or MER.
I'm sorry, but is there something wrong with my math here?
Total amount invested by fund A: ~$11.5B Percent rumored to be lost in internet blogs including this one: 70% ("can't sell for 30 cents on the dollar" - check the beginning of this thread) Implied loss: $8 billion Actual loss: $600 million Multiple by which internet rumor-mongering overstated the impact: 13X
So now we see the extent of the debacle, and you are acting like its the end of the world, when the actual impact was oh, lets see - 7.5% of what was thrown out earlier?
Is it just me, or have you all completely lost perspective? If Jim Cramer turned bearish, I now know what he would sound like.
I know, you are tired of listening about the whole subprime issue and you wish it to go away. Now, it will.
Along with a lot more
It is time for rejoicing.
Will we see the dollar fall below the 80 thresh hold as well as a potential nuclear explosion at Bear Sterns both happening tomorrow?
Stay tuned kiddies! This is going to be hard for even the bulls at CNBC to spin!
Down to 8.24 now, hopefully, it blows down more when the European markets open.
It is the end, the end of the subprime fiasco and the end of stupid real estate markups.
I don't know if I am more giddy with anticipation of this madness being over (and my shorts coming in BIG TIME), or scared of the financial carnage that will befall most of my fellow Americans.
Down to 8.24 now, hopefully, it blows down more when the European markets open.
It is the end, the end of the subprime fiasco and the end of stupid real estate markups.
Hah! I feel like everyone here is drinking crazy juice or something.
What in the world makes any of you seriously believe that all the bubbles are going to crash tomorrow, and by Friday we'll be able to start moving up again?
The market is behaving irrationally. Here's what really happens tomorrow. Bear Sterns drops in stock price. More calls are made that the problem is contained. A few related stocks also lose a couple percent. By tomorrow afternoon, everyone is convinced enough that the problem is contained, that they simply move their money into something else. Net result, DOW is down 100 points...decent drop, but no biggie.
Oh yeah, we repeat this whole thing again in about 2-3 weeks, but with a different fund.
As the financial toxic waste gets marked to its correct value (zero), that will start to cause cascading markdowns and defaults.
Nobody wants to be the bagholder on this, and if there is no secondary market, there is no liquidity. No liquidity means higher interest rates. Higher interest rates mean lower prices. Lower prices mean more CDO defaults...
Lather, rinse, repeat...
If the US Peso goes cliff diving, and Uncle Ben has to step in and hike rates, then your scenario of instant financial nuclear holocaust takes place.
I don't think that the these two hedge funds collapsing will be enough to totally dismantle the bulls on the street. However, it is going to be increasingly harder to argue from here on out that the subprime mess is contained. More and more funds are going to be under increased scrutiny and like E said, the current mark-to-model in use will be done.
I have an inside source that say that the legislation passed in Minnesota that essentially takes ALL exotic loans off the table may be coming to neighborhood near you soon! Congress is putting steep pressure on Federal regulators to fix the problem before they are "forced" to step in (not that it isn't already too late), and you will see a pilot program in effect very soon.
All of these investment firms are currently trying to get rid of all of their exposure to subprime. If subprime and housing was the main source of fuel for these funds the last 4-5 years, where does that leave them? Its just a matter of time before the spotlight is shone brightly on the risk that has currently been ignored the last few years. I'm not saying it will be today, this week, or even this month, but soon enough it will be noticed.
I'm sorry, but is there something wrong with my math here?
Total amount invested by fund A: ~$11.5B Percent rumored to be lost in internet blogs including this one: 70% ("can't sell for 30 cents on the dollar" - check the beginning of this thread) Implied loss: $8 billion Actual loss: $600 million Multiple by which internet rumor-mongering overstated the impact: 13X
So now we see the extent of the debacle, and you are acting like its the end of the world, when the actual impact was oh, lets see - 7.5% of what was thrown out earlier?
Is it just me, or have you all completely lost perspective? If Jim Cramer turned bearish, I now know what he would sound like.
I know, you are tired of listening about the whole subprime issue and you wish it to go away. Now, it will.
Along with a lot more
It is time for rejoicing.
No, I am just saying you should get your facts straight. Compared to the stories that were going around, these bankers pulled a rabbit out of their hat. The total potential exposure for the first fund was $11 billion. They lost $600 million. You guys don't seem to get that. The impact was a fraction of what was predicted, yet the tone of this thread is "told you so". It's simply not true.
Aight, it sounds like everyone agrees that this will not really finish falling out today. So far, it looks like my prediction is spot on.
DOW down 80 points right now, and Bernanke spinning bad news into 'good' that the economy 'will' 'grow' this year.
Calls that this is contained will continue. After all, it's contained to just subprime borrowers, exotic loan users, subprime lenders, Bear Sterns, and those who invested in two Bear Sterns hedge funds.
Do you know what else was contained? The TITANIC! It had compartments which couldn't spill over in the case of a hull breach...
Just to see that we are on the same page here. The investors initial investment in ONE of the two funds was 600 million correct? They are going to lose all of this. Sounds like both funds are going to end up being worthless. I don't think that whatever the final numbers end up being, either 600-1,000 million is anything to sneeze at. I'm not sure what the total leverage was on either of the two funds, but the impact is going to be felt.
Another thing to ponder. The FED is in serious danger of having its power to regulate the mortgage industry stripped by Congress. The only thing that the FED has passed so far in regards to regulating the lending industry are "guidelines". Guess what? Guidelines are not enforceable. The lenders are still looking to Wall St. for guidance and not the FED. Wall St. so far is totally oblivious to any sort of risk right now, and are giving lenders the green light. The FED is going to have to pass something more than just guidelines for fear of having Congress step in a bitch slap them across the room.
If you think we have seen tightening already, that is absolutely nothing compared to what we are going to be seeing at the end of the year. You are going to see states pass legislation similar to what has already been passed in Minnesota that prohibit almost all forms of kinky loans. States react once they believe that the federal government is totally blind as to what is going on. Watch for the FED to step in and establish some lending rules, not just guidelines, in the near future. That will REALLY put the clamps on the lending industry.
Just to see that we are on the same page here. The investors initial investment in ONE of the two funds was 600 million correct? They are going to lose all of this. Sounds like both funds are going to end up being worthless. I don't think that whatever the final numbers end up being, either 600-1,000 million is anything to sneeze at. I'm not sure what the total leverage was on either of the two funds, but the impact is going to be felt.
It's nothing to sneeze at, and if I'm one of those investors, I'm pretty pissed - no doubt. But the exposure to loss was far, far, far greater. They were levered up 20x according to the bloomberg article. So the first fund could have lost up to ~$11B if the assets (e.g. the underlying CDOs) were worthless. The $600mm they lost was the principal. They lost none of the debt.
Those investors could have had a margin call for 20x their initial investment if the bonds were "worthless". The fact is they recovered 95 cents on the dollar of the value of the assets in which they were invested. This is not a story about the cataclysmic downfall of MBS and CDOs. It's just an ordinary, every day example of the pitfalls of leverage. The more extreme the leverage, the more extreme the exposure.
Look at the MarkIt charts. The worst tranches of bonds (BBB) are down from 99 to 88 - about 12%. And the fund was undoubtedly designed so that when these fell, some other asset was supposed to be going up (ergo, the reason it is called a "Hedge Fund") so they seem to have recovered some of that. Clearly it didn't work as intended, but they only lost their principal - which to me is surprising given all the doom and gloom predictions.
...It seems to me that the problem here was the leverage as much or more than the instruments in which they invested. Somebody should be fired, but the doom and gloom posts are a bit OTT imho..
....Compared to the stories that were going around, these bankers pulled a rabbit out of their hat. The total potential exposure for the first fund was $11 billion. They lost $600 million. You guys don't seem to get that.....
...but they only lost their principal - which to me is surprising given all the doom and gloom predictions.
DJO
I agree that the collapse of these two hedge funds is not a single event catastrophe that will take down the world economy. However, I sense that there will be some significant consequences of which I freely admit that I do not fully understand as of yet, but that's why I like watching this situation. I'm learning as this whole thing develops.
I understand that these funds were highly leveraged so that the actual amount lost by investors is around 13 times less than what the funds were originally valued, but Bear is on the hook for all those $billions of loans, right? Not to worry, I've also read somewhere that Bear is big enough to take the hit.
..
I understand that these funds were highly leveraged so that the actual amount lost by investors is around 13 times less than what the funds were originally valued, but Bear is on the hook for all those $billions of loans, right? Not to worry, I've also read somewhere that Bear is big enough to take the hit.
]
My understanding is that they've liquidated the funds and paid back the lenders - so the only hit is to the original investors + Bear lost $200mm of the $1.4B they put in to save the funds.
I'd bet that the liquidation is the reason we've been seeing the MarkIt charts plunge over the last week or so. The market knows that Bear is screwed, so they're only buying at a discount. Based on all the insiders knowing they had a distressed seller, I would say that the current quotes on these assets are probably under true value.
I used to work on Wall St. in energy commodities trading. We traded both liquid assets (e.g. futures and options) and less liquid (e.g. oil and gas cargoes on the water). With the liquid stuff, you were fine to go in and out. With the less liquid assets - if the guy on the other side of the trade had a whiff of distress - you were screwed. He was gonna take it out of your hide. The CDO's here are pretty illiquid and and they are traded directly, not via an exchange. I can only imagine what those phone calls were like...
...My understanding is that they've liquidated the funds and paid back the lenders - so the only hit is to the original investors + Bear lost $200mm of the $1.4B they put in to save the funds...
DJO
You may be right about the above, but it's not how I understand the situation.
..
...My understanding is that they've liquidated the funds and paid back the lenders - so the only hit is to the original investors + Bear lost $200mm of the $1.4B they put in to save the funds...
DJO
You may be right about the above, but it's not how I understand the situation.
..
The fund that now has nothing left for investors, known as the enhanced fund, had $638 million of capital as of March 31, according to performance reports sent to clients at the time. It also borrowed about $11 billion to make bigger bets. Bear Stearns said last week that the fund's debt had dropped to $600 million.
$638mm invested. $600mm in debt left. Zero value. Rest of $11B paid back.
In any case, typically the investors in the fund would be on the hook for the debt if it had to be paid back - not Bear. According to the same article, Bear has now assumed the debt on the other fund. I'd read this as saying they are confident they'll get paid back on that one - not as indication the assets are more distressed than in the first fund. These guys are i-bankers, not a charitable organization.
...$638mm invested. $600mm in debt left. Zero value. Rest of $11B paid back....
Are you saying that Bear raised $10.4B by selling fund assets? Where did the funds come from to pay off the debt?
..
They sold the CDOs that they bought with the money they borrowed...
Principle: $0.6B
Debt: $11.0B
Funds available to invest: $11.6B
So, they go out and buy $11.6B in CDOs. Then they get investors wanting out - which would violate their convenants, so they have to unwind their positions and pay back debt.
Let me take this opportunity to provide you with an update on the status of the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds managed by Bear Stearns Asset Management.
A team at BSAM has been working diligently to calculate the 2007 month-end performance for both May and June for the funds This process has been much more time-consuming than in prior months due to increasingly difficult market conditions.
As you know, in early June, the Funds were faced with investor redemption requests and margin calls that they were unable to meet. The Funds sold assets in an attempt to raise liquidity, but were unable to generate sufficient cash to meet the outstanding margin obligations.
As a result, counterparties moved to seize collateral or otherwise terminate financing arrangements they had with the Funds. During June, the Funds experienced significant declines in the value of their assets resulting in losses of net asset value.
The Funds' reported performance, in part, reflects the unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities.
Fund managers and account executives have been informing the Funds' investors of the significant deterioration in performance for May and June.
The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007. In light of these returns, we will seek an orderly wind-down of the Funds over time.
This is a difficult development for investors in these Funds and it is certainly uncharacteristic of BSAM's overall strong record of performance.
Bear Steams has been working to achieve the best possible outcome for investors under these circumstances. On June 26th, Bear Stearns committed $1.6bn in a collateralized repo line to the High-Grade Fund
At this time, approximately $1.4bn remains outstanding on this line and we continue to believe there are sufficient assets available in the High-Grade Fund to fully collateralize the repo facility.
In the past weeks. Bear Steams has taken action to restore investor confidence in BSAM. On June 29th, we announced that Jeff Lane was appointed chairman and chief executive officer of BSAM. Tom Marano, head of Bear Steams' mortgage department, has been assigned to BSAM to aid in achieving orderly sales of the Funds' assets.
The risk management function at BSAM has been restructured so that it will now report up to Mike Alix, Bear Stearns' chief risk officer, creating an additional layer of oversight. Mike Winchell, former head of risk management for Bear Stearns and most recently with Bear Wagner, has been engaged to consult with BSAM with regard to its hedge fund risk management function.
Throughout this time, we have appreciated the support of our loyal client base and we will work to continue to provide you with the high quality products and services you have come to expect from Bear Stearns.
Let us take this opportunity to reconfirm that the Bear Steams franchise is financially strong and committed to meeting your investment needs.
Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the Firm's proud history of achievement. As always, please contact us if we can be of service.
Comments
Owwieeee.
BSC is NOT the only grenade rolling around on the floor.
Run and hide.
Ouch. 91% haircut on one fund, 100% on the other.
It says very little value is left for the investors - principal in the funds was about $900 million, which was levered up 6-10x with debt.
So is it 9 cents on the dollar for principal, or the entire levered amount?
I'm seeing people commenting on this as if it was the latter - I think its the former.
anyone know for sure?
to answer my own question - based on this article from bloomberg, it's pretty clearly the former. So $600 million in one fund and ~$800million in the other. The "Ehnanced Leverage Fund" was levered 20x - so this means they lost all of their net investment - based on only about 5% of their gross exposure. So in other words - the value of the bonds went down ~5% and that wiped out the fund. That's a long way from saying all the bonds they invested in are worthless. Actually, they are worth 95% of what they bought them for. unfortunately - they need to pay that amount back to their lenders...
It seems to me that the problem here was the leverage as much or more than the instruments in which they invested. Somebody should be fired, but the doom and gloom posts are a bit OTT imho
Will we see the dollar fall below the 80 thresh hold as well as a potential nuclear explosion at Bear Sterns both happening tomorrow?
Stay tuned kiddies! This is going to be hard for even the bulls at CNBC to spin!
I thought that subprime was contained???????????? WTF?
I seriously don't see the worry in the market though, it's like they don't care.
Weird. I would think this has massive implications for the economy as a whole.
Total amount invested by fund A: ~$11.5B
Percent rumored to be lost in internet blogs including this one: 70% ("can't sell for 30 cents on the dollar" - check the beginning of this thread)
Implied loss: $8 billion
Actual loss: $600 million
Multiple by which internet rumor-mongering overstated the impact: 13X
So now we see the extent of the debacle, and you are acting like its the end of the world, when the actual impact was oh, lets see - 7.5% of what was thrown out earlier?
Is it just me, or have you all completely lost perspective? If Jim Cramer turned bearish, I now know what he would sound like.
There is more to this story to come.
Once the BSC hedge funds mark to market, all the other funds out there in CDO land will have to do the same. This may cause a cascading default or liquidation across the industry.
What is important isn't the amount lost by BSC, but that the CDOs being marked to a theoretical model era has come to an end.
They will have to mark to a market, which will be much more problematic during a down cycle in housing.
Example:
If everyone in Ballard had their retirement dreams held in the prices of the homes there, and everyone agreed that Ballard homes are all worth $1M each, then they can all act like they have a cool $1M ready for their golden years. Suddenly, the bank that is holding the note for some crazy musician decides they have too much risk and try to foreclose/call the loan, they have to sell the house. If the house only gets a bid of $600K, and the bank was on the hook for $800K, the musician loses 100% and the bank loses 25%. No big deal in the big picture.
The stink comes from all the other banks that have notes in Ballard. They just looked at 'shugy's house and hit the panic button. Now, they don't want to continue to fund homes in Ballard at the $1M price. They will only fund at the $600K price, but if there is a stampede, then they can only fund at $250K.
Can you see the problem here?
Mark to model was institutional fraud. Those days are over, but they were responsible for the enormous tidal wave of liquidity that fueled this madness to begin with. With that over, the contraction will continue and that will make the mark to market even worse.
The excitement over the BSC funds is very, very justified.
Lastly, we don't know the extent of the immediate damage to BSC or MER.
Well
Put.
Thanks.
Along with a lot more
It is time for rejoicing.
It is the end, the end of the subprime fiasco and the end of stupid real estate markups.
Anticipation and fear are very closely related.
CRASH HELMETS STRAPPED TIGHT!!!!
SET CRASH CONDITION 2!
Hah! I feel like everyone here is drinking crazy juice or something.
What in the world makes any of you seriously believe that all the bubbles are going to crash tomorrow, and by Friday we'll be able to start moving up again?
The market is behaving irrationally. Here's what really happens tomorrow. Bear Sterns drops in stock price. More calls are made that the problem is contained. A few related stocks also lose a couple percent. By tomorrow afternoon, everyone is convinced enough that the problem is contained, that they simply move their money into something else. Net result, DOW is down 100 points...decent drop, but no biggie.
Oh yeah, we repeat this whole thing again in about 2-3 weeks, but with a different fund.
What is different is the death of mark-to-model.
That is huge. Very huge. Unfathomably huge.
As the financial toxic waste gets marked to its correct value (zero), that will start to cause cascading markdowns and defaults.
Nobody wants to be the bagholder on this, and if there is no secondary market, there is no liquidity. No liquidity means higher interest rates. Higher interest rates mean lower prices. Lower prices mean more CDO defaults...
Lather, rinse, repeat...
If the US Peso goes cliff diving, and Uncle Ben has to step in and hike rates, then your scenario of instant financial nuclear holocaust takes place.
This is significant.
CRASH CON 2 is set.
I don't think that the these two hedge funds collapsing will be enough to totally dismantle the bulls on the street. However, it is going to be increasingly harder to argue from here on out that the subprime mess is contained. More and more funds are going to be under increased scrutiny and like E said, the current mark-to-model in use will be done.
I have an inside source that say that the legislation passed in Minnesota that essentially takes ALL exotic loans off the table may be coming to neighborhood near you soon! Congress is putting steep pressure on Federal regulators to fix the problem before they are "forced" to step in (not that it isn't already too late), and you will see a pilot program in effect very soon.
All of these investment firms are currently trying to get rid of all of their exposure to subprime. If subprime and housing was the main source of fuel for these funds the last 4-5 years, where does that leave them? Its just a matter of time before the spotlight is shone brightly on the risk that has currently been ignored the last few years. I'm not saying it will be today, this week, or even this month, but soon enough it will be noticed.
No, I am just saying you should get your facts straight. Compared to the stories that were going around, these bankers pulled a rabbit out of their hat. The total potential exposure for the first fund was $11 billion. They lost $600 million. You guys don't seem to get that. The impact was a fraction of what was predicted, yet the tone of this thread is "told you so". It's simply not true.
It
DOW down 80 points right now, and Bernanke spinning bad news into 'good' that the economy 'will' 'grow' this year.
Calls that this is contained will continue. After all, it's contained to just subprime borrowers, exotic loan users, subprime lenders, Bear Sterns, and those who invested in two Bear Sterns hedge funds.
Do you know what else was contained? The TITANIC! It had compartments which couldn't spill over in the case of a hull breach...
Just to see that we are on the same page here. The investors initial investment in ONE of the two funds was 600 million correct? They are going to lose all of this. Sounds like both funds are going to end up being worthless. I don't think that whatever the final numbers end up being, either 600-1,000 million is anything to sneeze at. I'm not sure what the total leverage was on either of the two funds, but the impact is going to be felt.
If you think we have seen tightening already, that is absolutely nothing compared to what we are going to be seeing at the end of the year. You are going to see states pass legislation similar to what has already been passed in Minnesota that prohibit almost all forms of kinky loans. States react once they believe that the federal government is totally blind as to what is going on. Watch for the FED to step in and establish some lending rules, not just guidelines, in the near future. That will REALLY put the clamps on the lending industry.
It's nothing to sneeze at, and if I'm one of those investors, I'm pretty pissed - no doubt. But the exposure to loss was far, far, far greater. They were levered up 20x according to the bloomberg article. So the first fund could have lost up to ~$11B if the assets (e.g. the underlying CDOs) were worthless. The $600mm they lost was the principal. They lost none of the debt.
Those investors could have had a margin call for 20x their initial investment if the bonds were "worthless". The fact is they recovered 95 cents on the dollar of the value of the assets in which they were invested. This is not a story about the cataclysmic downfall of MBS and CDOs. It's just an ordinary, every day example of the pitfalls of leverage. The more extreme the leverage, the more extreme the exposure.
Look at the MarkIt charts. The worst tranches of bonds (BBB) are down from 99 to 88 - about 12%. And the fund was undoubtedly designed so that when these fell, some other asset was supposed to be going up (ergo, the reason it is called a "Hedge Fund") so they seem to have recovered some of that. Clearly it didn't work as intended, but they only lost their principal - which to me is surprising given all the doom and gloom predictions.
DJO
I agree that the collapse of these two hedge funds is not a single event catastrophe that will take down the world economy. However, I sense that there will be some significant consequences of which I freely admit that I do not fully understand as of yet, but that's why I like watching this situation. I'm learning as this whole thing develops.
I understand that these funds were highly leveraged so that the actual amount lost by investors is around 13 times less than what the funds were originally valued, but Bear is on the hook for all those $billions of loans, right? Not to worry, I've also read somewhere that Bear is big enough to take the hit.
..
My understanding is that they've liquidated the funds and paid back the lenders - so the only hit is to the original investors + Bear lost $200mm of the $1.4B they put in to save the funds.
I'd bet that the liquidation is the reason we've been seeing the MarkIt charts plunge over the last week or so. The market knows that Bear is screwed, so they're only buying at a discount. Based on all the insiders knowing they had a distressed seller, I would say that the current quotes on these assets are probably under true value.
I used to work on Wall St. in energy commodities trading. We traded both liquid assets (e.g. futures and options) and less liquid (e.g. oil and gas cargoes on the water). With the liquid stuff, you were fine to go in and out. With the less liquid assets - if the guy on the other side of the trade had a whiff of distress - you were screwed. He was gonna take it out of your hide. The CDO's here are pretty illiquid and and they are traded directly, not via an exchange. I can only imagine what those phone calls were like...
DJO
You may be right about the above, but it's not how I understand the situation.
..
According to bloomberg, on the first fund...
$638mm invested. $600mm in debt left. Zero value. Rest of $11B paid back.
In any case, typically the investors in the fund would be on the hook for the debt if it had to be paid back - not Bear. According to the same article, Bear has now assumed the debt on the other fund. I'd read this as saying they are confident they'll get paid back on that one - not as indication the assets are more distressed than in the first fund. These guys are i-bankers, not a charitable organization.
Are you saying that Bear raised $10.4B by selling fund assets? Where did the funds come from to pay off the debt?
..
Thanks for the clarification. Makes sense.
They sold the CDOs that they bought with the money they borrowed...
Principle: $0.6B
Debt: $11.0B
Funds available to invest: $11.6B
So, they go out and buy $11.6B in CDOs. Then they get investors wanting out - which would violate their convenants, so they have to unwind their positions and pay back debt.
Bear Stearns letter sent to investors last night
Dear Client of Bear, Stearns & Co. Inc,
Let me take this opportunity to provide you with an update on the status of the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds managed by Bear Stearns Asset Management.
A team at BSAM has been working diligently to calculate the 2007 month-end performance for both May and June for the funds This process has been much more time-consuming than in prior months due to increasingly difficult market conditions.
As you know, in early June, the Funds were faced with investor redemption requests and margin calls that they were unable to meet. The Funds sold assets in an attempt to raise liquidity, but were unable to generate sufficient cash to meet the outstanding margin obligations.
As a result, counterparties moved to seize collateral or otherwise terminate financing arrangements they had with the Funds. During June, the Funds experienced significant declines in the value of their assets resulting in losses of net asset value.
The Funds' reported performance, in part, reflects the unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities.
Fund managers and account executives have been informing the Funds' investors of the significant deterioration in performance for May and June.
The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007. In light of these returns, we will seek an orderly wind-down of the Funds over time.
This is a difficult development for investors in these Funds and it is certainly uncharacteristic of BSAM's overall strong record of performance.
Bear Steams has been working to achieve the best possible outcome for investors under these circumstances. On June 26th, Bear Stearns committed $1.6bn in a collateralized repo line to the High-Grade Fund
At this time, approximately $1.4bn remains outstanding on this line and we continue to believe there are sufficient assets available in the High-Grade Fund to fully collateralize the repo facility.
In the past weeks. Bear Steams has taken action to restore investor confidence in BSAM. On June 29th, we announced that Jeff Lane was appointed chairman and chief executive officer of BSAM. Tom Marano, head of Bear Steams' mortgage department, has been assigned to BSAM to aid in achieving orderly sales of the Funds' assets.
The risk management function at BSAM has been restructured so that it will now report up to Mike Alix, Bear Stearns' chief risk officer, creating an additional layer of oversight. Mike Winchell, former head of risk management for Bear Stearns and most recently with Bear Wagner, has been engaged to consult with BSAM with regard to its hedge fund risk management function.
Throughout this time, we have appreciated the support of our loyal client base and we will work to continue to provide you with the high quality products and services you have come to expect from Bear Stearns.
Let us take this opportunity to reconfirm that the Bear Steams franchise is financially strong and committed to meeting your investment needs.
Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the Firm's proud history of achievement. As always, please contact us if we can be of service.