The Wall Street Journal provides a pre-holiday Bear recap, “After Blowup, Bear to Revamp Risk Control” (reproduced in full below). The high points:
1. Bear is bringing its asset management unit under tighter control of its parent and implementing stronger risk controls. Apparently the stringent practices of its trading floor weren’t observed in the asset management area.
2. The hedge fund to which the firm decided not to provide support (the more leveraged Enhanced Leverage Fund) is still alive but barely so. Investors “are almost certain to lose their money.” Does that mean in whole or in part? Stay tuned.
Update (8:30 a.m.) The problem with late night/early a.m. posting is that the desire to turn in sometimes leads to reduced powers of observation. Item 2 suggests that creditors of this fund haven’t issued margin calls (remember, $1.2 billion of debt has been reported to be still outstanding) since that would have precipitated forced sales that likely would have gotten some comment and hastened the fund’s demise (or else any margin calls have been for relatively small positions). That means the wind-up of the fund is probably to satisfy investor redemption requests. But given the limited disclosure, this is all informed guesswork.
From the Journal:
In the wake of the meltdown of two prominent internal hedge funds, executives at Wall Street firm Bear Stearns Cos. plan to strengthen the risk controls in their money-management unit, say people familiar with the matter.
One priority, say these people, is giving the parent company greater oversight of the money-management division, a unit with $60 billion under management that includes hedge funds, private equity and bond funds. To ensure more supervision, the risk-management team within Bear Stearns Asset Management is likely to report to Michael Alix, the parent company’s chief risk officer, these people said.
Bear also expects to add new risk managers to the team, which had reported to the division’s own chairman and chief executive.
Such moves are an acknowledgment that despite Bear’s reputation for extensive risk management, the checks and balances that keep its brokerage arm out of trouble have not been as effective in its asset-management unit.
Last month, two of the division’s hedge funds, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, imploded after bets on the market for subprime home loans — which cater to borrowers with weak credit — went bust.
The funds’ manager, Bear veteran Ralph Cioffi, has spent recent weeks scrambling to come to terms with creditors.
Following a series of forced asset sales and margin calls, or requests for additional cash or collateral from lenders, the two funds, which once controlled $20 billion, have been reduced to shadows of themselves. The Enhanced Leverage fund appears increasingly likely to go belly up, say people close to the fund, and investors are almost certain to lose their money. But the other fund may be salvaged by an 11th-hour, $1.6 billion secured line of credit from Bear.
It’s been an unpleasant wake-up call for Bear executives, who pride themselves on their reputation for savvy risk management. Unlike competitors such as Goldman Sachs Group Inc., which tend to take higher risks and can generate far higher returns as a result, Bear has tended to make more conservative bets in order to generate more consistent results.
One built-in incentive to avoid huge risk is that about a third of the firm’s shares outstanding are in employees’ hands, meaning that if Bear’s stock takes a dive, so does that group’s personal wealth. At 4 p.m. yesterday in New York Stock Exchange composite trading, Bear shares were up $3.16, or more than 2%, to $143.16.
To shore up confidence in the asset-management unit, the company on Friday named veteran money manager Jeffrey Lane, a former vice chairman of Lehman Brothers Holdings Inc. and onetime chairman of Neuberger Berman LLC, to run Bear Stearns Asset Management. He succeeded Richard Marin, who had joined the group in 2003 and nearly tripled its assets under management before seeing the High-Grade funds run into trouble. Mr. Marin will stay on as an adviser.
Mr. Lane started work yesterday. Along with the almost certain naming of new risk managers in the asset-management division, and the probable reporting to Mr. Alix, other tweaks to the structure are likely, say the people familiar with the matter. But the details are as yet unclear. Through a spokesman, Mr. Alix declined to comment.