Subprime puts Bear Stearns fund on brink
By Ben White and Saskia Scholtes in New York
Published: June 20 2007 00:03 | Last updated: June 20 2007 00:03
A highly leveraged Bear Stearns hedge fund that made bad bets on the subprime mortgage market was on the brink of failure on Tuesday after Merrill Lynch rejected a proposed rescue plan and prepared to auction off $850m of assets that the fund had pledged as collateral.
In addition to large losses for investors and lenders to the Bear Stearns fund, some analysts feared that a failure of the fund could accelerate losses in the subprime mortgage-backed securities market and perhaps trigger a loss of confidence in the wider market for complex structured finance securities.
That, in turn, could lead to heavy selling and losses for investors, including Wall Street banks that hold some debt instruments before they are packaged and sold to investors. The Bear Stearns fund, which raised $600m from investors and borrowed at least $6bn more, presented a rescue plan on Tuesday to Merrill and other creditors.
Under the plan, banks such as Citigroup and Barclays Capital would have invested $500m in equity capital to help the fund meet margin calls. Bear Stearns itself, which has little direct exposure to the fund, would have put up $1.5bn on a fully collateralised basis.
The plan, presented by advisers from Blackstone, the buy-out firm, would also have required creditors not to make margin calls for 12 months.
Merrill rejected the plan, in part, because of the 12 month requirement, people close to the matter said. Merrill late on Tuesday circulated a list of assets it planned to sell to potential group of investors thought to include firms such as Fortress and Citadel.
Merrill’s rejection could lead other creditors to seize and sell collateral held by the fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage fund. That would mean the fund would likely be forced to liquidate remaining assets to repay creditors and investors.
The remaining assets left for the fund to sell could be riskier and harder to price securities, which might have to be sold at significant losses if dumped in a hurry.
The Bear fund’s bets went bad amid turmoil in the subprime mortgage market, leading to a 23 per cent drop in its value. A companion $1bn Bear Stearns mortgage backed securities fund has fallen about 5 per cent, according to people close to the matter.