Bear Stearns Seizes Securities From Failed Hedge Fund

Bear Stearns Cos. seized securities from one of its failed hedge funds to control their sale as prices plummet amid a flight by investors from risky assets.Taking the securities will allow Bear Stearns to establish hedges to “protect against future price declines,” a spokesman, Russell Sherman, said yesterday in an interview. The New York-based firm will continue an “orderly liquidation” of the High-Grade Structured Credit Strategies Fund, he said.Bear Stearns last month assumed the fund’s debt, then valued at $1.6 billion, after creditors seized assets from a sister fund that also bet on collateralized debt obligations. Prices for CDOs, which repackage bonds, loans, and derivatives into new securities, have tumbled as rising defaults on home mortgages decreased investor appetite for risk. The fallout spread yesterday, as stocks fell worldwide.“It’s a bloodbath in the markets, so it’s tough to tell whether things will recover,” an analyst at Minneapolis-based Thrivent Financial for Lutherans, which owns about 200,000 Bear Stearns shares, Erin Archer, said. “It’s no longer a Bear Stearns problem but a market problem.”The Dow Jones Industrial Average and the Standard & Poor’s 500 Index fell the most since February, while the FTSE 100’s biggest drop in four years led declines across Europe. Benchmark stock indexes in Argentina, Brazil, Mexico, Turkey, and Sweden sank more than 3%.Bear Stearns told investors in the two hedge funds last week that they’ll get little if any money after “unprecedented declines” in the value of securities used to bet on subprime mortgages, or loans to homebuyers with the weakest credit.The firm has said it expects to lose no money from the debt it assumed from the High-Grade Structured Credit Strategies Fund.“We don’t anticipate any material change in financial exposure to Bear Stearns as a result of this action,” Mr. Sherman said. He said the debt Bear Stearns took over from the fund last month is now valued at $1.3 billion.Shares of Bear Stearns have lost 24% this year on concern the troubles in the mortgage market will hurt earnings. The firm was the largest American underwriter of mortgage-backed bonds in the last two years. It dropped to No. 2 this year, behind Lehman Brothers Holdings Inc. Shares of Lehman have dropped 17%.Bear Stearns shares lost $5.03, or 3.9%, to $124.25 in New York Stock Exchange composite trading yesterday.The two Bear Stearns funds had hedged their CDO bets using derivatives. When the hedges and the securities declined at the same time, the funds lost as much as 20% of their value, prompting clients to demand their money back, and spurring creditors to seek more collateral. That forced the funds to liquidate at least $4 billion of securities in June.Lenders including Merrill Lynch & Co. seized assets when their margin calls weren’t met. Merrill eventually sold a portion of the $850 million of securities it took from the funds.Bear Stearns will probably lose its own $34 million investment in the funds, as well as $43 million of unsecured loans it made to them. The firm will also forego about $30 million in management fees it would otherwise collect annually, at the typical 2% rate for hedge funds.Last month, Bear Stearns ousted the head of its asset-management unit, Richard Marin, replacing him with vice chairman of Lehman, Jeffrey Lane, who has four decades on Wall Street. The firm also assigned its top mortgage trader, 45-year-old Tom Marano, to get the best prices for the funds’ remaining assets.

Bear Stearns Seizes Securities From Failed Hedge Fund

Bear Stearns Seizes Securities From Failed Hedge Fund

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