Bear Stearns not planning to bail out second fund
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.
Barney Frank, U.S. House Financial Services Committee Chairman, told Reuters on Tuesday that problems with home loans to less credit-worthy individuals are not likely catastrophic.
"I don't believe it's going to lead to a financial meltdown," Frank said.
Securities and Exchange Commission Chairman Chris Cox told a U.S. House of Representatives Financial Services Committee meeting he sees little systemic risk arising from liquidity issues.
Bear's shares edged up 25 cents, or 0.18 percent, to $139.35 on the New York Stock Exchange, not far off their lowest level since September.
NEVERQUEST
The two Bear Stearns hedge funds made bad investments in CDOs that were portfolios of subprime mortgages.
Similar difficulty with CDOs likely spurred Everquest Financial Ltd., a company formed by Bear Stearns to invest in the securities, to withdraw on Monday its registration for a $100 million initial public offering.
Everquest managed $720 million of collateralized debt obligations as of the end of 2006. It filed plans on May 9 for an IPO.
Ralph Cioffi, the co-chief executive of Everquest, was also the manager of the two troubled Bear hedge funds.
Everquest is a Cayman Islands-registered business jointly run by Bear Stearns Asset Management and Stone Tower Capital LLC, a hedge fund firm specializing in debt.
