Over the years, Bear Stearns, formed in 1923, built a formidable reputation as one of the savviest bond players. However, this reputation was shaken badly as in June this year, it disclosed that bad loans in the mortgage and fixed income business affected it badly in probably one of the worst-ever crises in more than eight decades of its existence. Two of its hedge funds filed for bankruptcy recently, after it admitted that one was essentially worthless and the other had lost more than 90% of its value. "The preliminary estimates show that 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", the company wrote a letter to its investors. The two funds were highly leveraged, meaning they borrowed heavily to invest in Collateralized Debt Obligations (CDOs) that were linked to subprime mortgages.
For Bear, which has been a formidable player in the mortgage-backed securities trading market, things began to turn nasty this year due to weakness in the subprime market, in particular, and in the US housing market, in general. The two funds, which managed about $10 bn in mortgage-related assets reported double-digit losses through April, this year, after making bad bets on securities backed by subprime loans; rising delinquencies led to the trouble in the mortgage-backed securities market. The company blamed a decline in mortgage lending and lackluster housing sector for its poor performance. However, investors rushed to withdraw money from the two funds fearing further dip in their investment. Merrill Lynch, a major lender to Bears hedge funds, sold off collaterals worth $850 mn from the two troubled hedge funds. |
