U.S. monitors market liquidity after fund bailout

WASHINGTON, June 25 (Reuters) - U.S. banking regulators are monitoring liquidity in the markets after Bear Stearns Cos. Inc.'s BSC.N $3.2 billion bailout of a struggling hedge fund, Comptroller of the Currency John Dugan said on Monday.

The High-Grade Structured Credit Strategies Fund suffered big losses after making bad bets in the repackaged subprime mortgage loan market when homeowner defaults started rising. Concerns have been raised about other funds that invested in similar bonds linked to subprime mortgages, which are known as a collateralized debt obligations (CDOs).

"I couldn't say that it was the tip of the iceberg," Dugan told reporters when asked if the Bear Stearns fund indicated similar problems may be on the horizon.

"I think there has been and continues to be lots of liquidity in the market but obviously we'll continue to monitor that situation closely," Dugan said after addressing a home foreclosure prevention event.

CDOs have been a widely used financial instrument for a number of years, Dugan said.

When asked if federal banking regulators are aware of the level of CDOs in the underlying assets of hedge funds, he said: "Yes, we are."

Dugan said federal banking regulators were not directly involved in the Bear Stearns bailout of the fund it manages.

"Of course we were monitoring the situation closely but this was something that was done by private parties working with private parties," Dugan said.

In the bailout announced on Friday, Bear Stearns will provide secured financing to the fund so it can sell assets in an orderly fashion. The rescue plan of up to $3.2 billion has been described as the biggest since Wall Street's 1998 rescue of Long-Term Capital Management.

Separately, BusinessWeek reported that a restatement by another Bear Stearns fund -- the High-Grade Structured Credit Strategies Enhanced Leverage Fund -- is facing a preliminary inquiry from another regulator, the U.S. Securities and Exchange Commission.

The SEC declined to comment and a spokesman for Bear Stearns was not immediately available for comment.

Bear Stearns shares closed down 3.2 percent on Monday at $139.10 in trading on the New York Stock Exchange.