Bear Stearns not planning to bail out second fund

By Dan Wilchins

NEW YORK (Reuters) - Bear Stearns Cos. Inc. BSC.N does not plan to bail out the second of two struggling hedge funds -- citing stabilizing markets -- but the subprime loan woes that brought the funds down continue to rattle investors.

Stocks fell and Treasuries edged higher late in the session on concern problems stemming from defaults by less credit- worthy mortgage holders could reverberate through the markets.

Bill Gross, the manager of the largest bond fund in the world, said the subprime crisis was not isolated and would eventually take a toll on the U.S. economy.

But a U.S. lawmaker and the head of the Securities and Exchange Commission did not expect a systemic meltdown from Bear's woes.

Bear Stearns said it would not provide financing to a risky hedge fund it managed, the High-Grade Structured Credit Strategies Enhanced Leverage Fund.

The statement came just days after the investment bank agreed to provide up to $3.2 billion of financing to rescue another fund it manages, the Bear Stearns High-Grade Structured Credit Strategies Fund. That fund will likely end up needing about $1.6 billion of financing, Bear said.

That financing helped stabilize the market for the securities that the funds traded in -- bonds called collateralized debt obligations, which are essentially portfolios of debt, the investment bank said in a statement.

CDOs trade infrequently and many investors feared that, if creditors sold CDOs seized from Bear, the market as a whole for those securities would decline. In the worst case scenario, corporate borrowing costs could increase, leveraged buyout activity could decrease and the stock market could fall.

Both Bear funds had wracked up big losses. The High-Grade fund was down about 5 percent in the first four months of the year, while the Enhanced Leverage fund was down about 23 percent during that period.

Losses, combined with the funds restating their results, spurred margin calls and investor redemptions.

The two Bear Stearns funds are just some of the casualties of the subprime mortgage lending crisis, which has forced more than 30 lenders to sell themselves or file for bankruptcy.

Swiss bank UBS AG (UBSN.VX) said in May its Dillon Read Capital Management hedge fund arm lost 150 million Swiss francs ($122 million) after making bad bets on the U.S. subprime mortgage market.

ICEBERG

Some investors believe this could be the tip of the iceberg. PIMCO's Gross said on Tuesday that subprime mortgages could reduce consumption and new home building in the next 12 to 18 months. The Federal Reserve may decide to cut short-term rates sometime over the next six months, he added.

But not everyone is panicked. Fox-Pitt, Kelton analyst David Trone issued a report listing 10 reasons why he was sanguine about Bear's hedge fund issue, including the fact the hedge fund assets are legally segregated from the rest of the company's assets, so legal actions are unlikely to affect Bear itself.