Rescue plan for two hedge funds may falter
NEW YORK -- Bear Stearns Cos.'s attempt to rescue its money-losing hedge funds may falter now that creditor Merrill Lynch & Co. has decided to seize and sell $800 million worth of bonds held as collateral for loans to the funds.
Merrill Lynch accepted bids for the securities until 4 p.m. yesterday, said people with knowledge of the offering. JPMorgan Chase & Co. canceled its plans to sell about $400 million worth of bonds yesterday while creditors negotiate with New York-based Bear Stearns, one person said.
The 10-month-old High-Grade Structured Credit Strategies Enhanced Leverage Fund 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, have both 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 at Brown Brothers Harriman & Co. A warehouse is a credit line extended to CDO managers to buy the assets they plan to repackage into new securities.
A housing slump is leading to rising delinquencies on home loans, especially so-called subprime mortgages made to home buyers 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 closing or sale of dozens more.
Securities and Exchange Commission chairman Christopher Cox said the commission is tracking the turmoil at Bear Stearns.
"Our concerns are with any potential systemic fallout," Cox said. "So far, so good on that score."
The two Bear Stearns funds together controlled more than $20 billion a few weeks ago and had about $9 billion in loans as of Tuesday, The Wall Street Journal reported yesterday, citing unnamed sources. They'd encountered resistance to a bailout plan, the newspaper reported.
Shares of Bear Stearns fell for a third day, declining 2.5 percent to $143.20. The stock is down 12 percent this year.
