Conflicting Reports on Status of Bear Stearns Hedge Funds

Bloomberg is keeping up a rapid pace of stories on the Bear Stearns hedge funds. Bear has apparently found some buyers for the assets of its High-Grade Structured Credit Leveraged Fund, the one for which it put in place a secured credit facility to permit an orderly workout. This was not an official announcement by Bear (indeed, asset sales and reducing the size of the remaining facility is how this process is supposed to work) but is is a sign of how nervous the financial community is about the situation that what should be seen as routine positive developments get this level of attention).

Separately, a Reuters story, “U.S. monitors market liquidity after fund bailout,” reports that the Office of the Comptroller of the Currency has said there appeared to be ample market liquidity but it was monitoring the situation, and added in a coda:

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.

Some sources reported that one of the funds revised down its monthly NAV (Net Asset Value) report to investors considerably, which might be the reason for the inquiry. If this is the focus of the inquiry, if the fund’s managers were found to have engaged in deliberate false reporting (as opposed to merely incompetent reporting), it should not redound to Bear, since the fund was managed independently. However, if the risk management systems or pricing mechanisms were found to be badly flawed, that might dent Bears’ reputation, since the fund was using Bear systems.

As for the unresolved fate of the larger fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, the same Bloomberg piece cites unnamed sources who sound as if they are from Bear that claim that the amount needed to rescue the second fund is smaller, only $1 billion.

This flies in the face of all the demographics reported to date: that that fund had more borrowed and had lower quality assets. And if only $1 billion was at stake, one would imagine Bear would have been able to arrange some sort of workout program by now.

The Bloomberg story includes other reports of the loans outstanding to the second fund at $10 billion as of two weeks ago, and an estimate by analyst Guy Moszkowski that they are currently $7 billion.

One wonders if these moles are deliberately trying to confuse the picture. From Bloomberg:

Bear Stearns Cos. may put up $1.6 billion to rescue one of its money-losing hedge funds, half as much as it offered last week, according to two people with knowledge of the situation.

The size of the bailout dropped after the Bear Stearns High- Grade Structured Credit Fund found buyers for some assets and creditors sold others, said the people, who declined to be identified because they aren’t authorized to comment for the firm. Bear Stearns, the biggest U.S. broker to hedge funds, said June 22 it would assume $3.2 billion of loans to prevent lenders from liquidating assets.

The reduction means New York-based Bear Stearns won’t have to tie up as much capital to salvage the fund from bad bets on subprime mortgage bonds and collateralized debt obligations. Shares of Bear Stearns fell as much as 7.6 percent today as investors speculated that the funds’ tailspin and risks the firm faces in the mortgage market would reduce earnings.

“It’s certainly a plus for them that the amount they have to put up is much less than they thought earlier,” said Marshall Front, who helps manage about $800 million at Chicago-based Front Barnett Associates. “But the question remains about whether there are other assets that need to be valued differently and that question goes for the whole financial services community.”

Shares of other U.S. brokers and banks fell as well today on concern the hedge funds’ troubles could spread and hurt their brokers who lend to them. Goldman Sachs Group Inc., the largest securities firm, lost 2.5 percent. Lehman Brothers Holdings Inc. fell 2.1 percent. Citigroup Inc. declined 1.4 percent.

Bear Stearns spokeswoman Elizabeth Ventura declined to comment.

Second Fund

The second pool, Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, now owes about $1 billion, the people said. Together, the funds had borrowed about $10 billion as of two weeks ago, Bear Stearns Chief Financial Officer Samuel Molinaro said on a June 22 conference call with analysts. At the time, he said it was possible that bailing out the first fund would require less than $3.2 billion.

Ralph Cioffi, 51, the funds’ manager at Bear Stearns, was among the biggest buyers of CDOs backed by subprime mortgages, home loans to people with poor credit ratings or heavy debt loads. Sales of CDOs skyrocketed to $503 billion in 2006, according to estimates from Morgan Stanley.

Merrill Lynch & Co. analyst Guy Moszkowski said in a report to clients today that the $3.2 billion loan would represent about 15 percent of Bear Stearns’s after-tax equity. He also estimated that the so-called enhanced fund owed $7 billion to creditors. He said he based his estimate on Molinaro’s comments.

“My immediate reaction is that there’s so much opacity to this transaction that it’s really difficult to say whether this is less than we thought last week,” said Tim Mungovan, a partner at law firm Nixon Peabody LLP in New York and co-head of the alternative-investments litigation practice.

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