Bear Stearns to pay $3.2b for fund bailout
Rescue comes after creditors seize assets, investors seek refunds
NEW YORK -- Bear Stearns Cos. offered $3.2 billion in loans to bail out one of its failing hedge funds, the biggest rescue since 1998, after creditors started seizing assets and investors demanded their money back.
The High-Grade Structured Credit Strategies fund would be provided a credit line, the New York-based firm said yesterday. Bear Stearns is seeking to replace loans extended by banks including Citigroup Inc. and Lehman Brothers Holdings Inc.
Bear Stearns offered to salvage the fund, one of two that made bad bets on collateralized-debt obligations, after creditors including Merrill Lynch & Co. took the funds' CDOs as collateral and started selling them in auctions. An agreement with creditors would prevent a fire sale of the collateral, and help stem a plunge in prices, while potentially increasing the risk to Bear Stearns, the second-biggest underwriter of mortgage bonds.
"Bear needs to put this behind it as soon as possible," said Peter Goldman, who helps manage $600 million at Chicago Asset Management, including shares of Bear Stearns. "The firm might take on some of the risk of the fund they didn't have before, but they're a bond shop and they wouldn't take on risk they shouldn't."
The Bear Stearns fund lost about 10 percent of its value this year, while the related fund, the 10-month-old High-Grade Structured Credit Strategies Enhanced Leverage fund, lost about 20 percent, according to people familiar with the matter. Both funds are run by Ralph Cioffi, 51, a senior managing director.
Enhanced Leverage fund was more leveraged, meaning it had borrowed more relative to its assets. Talks with creditors to that fund are also underway, Bear Stearns said.
The funds received "high levels" of margin calls from creditors in the past few weeks and had trouble selling enough assets to keep running, Bear Stearns said.
"The uncertainty in the marketplace surrounding these funds has made an orderly deleveraging difficult," said James Cayne, chief executive of Bear Stearns. "By providing the facility we believe we will stabilize financing, reduce uncertainty in the marketplace, and allow for an orderly process."
Creditors extended $9 billion to the funds, which made bets of more than $11 billion, a person familiar with the situation said. Lenders include Merrill, Lehman, JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup, and Cantor Fitzgerald LP, all in New York. Bank of America Corp., Barclays PLC, and Deutsche Bank AG were the other lenders.
The funds speculated in highly rated CDOs -- securities backed by bonds, loans, derivatives, and other CDOs -- that were hurt in March and April as defaults on subprime mortgages increased. The fund also lost on opposite bets against home-loan bonds, which backed many of its CDOs.
As the funds faltered, Merrill sought to protect itself by seizing the assets that were used as collateral for its loans.
Cantor Fitzgerald also took collateral from its credit lines and sold the remaining securities in an auction Thursday, spokesman Robert Hubbell said.
JPMorgan offered some securities for sale before withdrawing its plan. Lehman also put some securities up for sale, according to a person familiar with the situation.