Subprime losses ravage Bear funds
Subprime losses ravage Bear funds
By FT Reporters
Copyright The Financial Times Limited 2007
Published: July 17 2007 23:44 | Last updated: July 18 2007 01:33
Bear Stearns on Tuesday told investors in two stricken hedge funds managed by the bank that one fund had lost all its value and the other had about nine cents remaining for every dollar invested following bad bets on the US subprime mortgage market.
The losses, especially for the less leveraged of the two funds, were worse than investors expected.
“They are a big investment house. They are supposed to be professional,” said one fund of funds executive. “There is nothing to do now except maybe go shoot the guy who did it.”
Bear Stearns declined to comment. The two funds at one point had more than $20bn in investments, much of it using borrowed money.
The funds were heavily exposed to the troubled subprime mortgage market through complex debt securities known as collateralised debt obligations (CDOs). Amid a sharp increase in late payments and defaults on subprime home loans – made to borrowers with patchy credit histories – the funds ran aground as creditors made margin calls.
The near collapse of the two funds was an embarrassment to Bear Stearns, a leader in the packaging and sale of mortgage-backed securities.
Bear Stearns shares are off about 9 per cent since the trouble at the two funds came to light and the price of buying insurance against a default by the bank on its bonds has increased. Bear Stearns’ stock price was about 2 per cent lower at $137.20 in after-hours trade.
In addition to risks associated with a $1.4bn loan extended by Bear Stearns to support the funds, investors appear concerned that the bank would have trouble expanding its asset management business.
The business is still relatively small, but it has been growing fast.
In the second quarter, revenues soared eight-fold to $184m, about 7 per cent of the group total, thanks largely to a jump in performance fees.
CDOs, which package portfolios of debt such as mortgages into high-yielding securities, are rarely traded and difficult to value.
News of the near collapse of the two funds in early June and the threat of large fire sales of CDO assets sparked fears of a widespread repricing of similar instruments.
In the event, only a fraction of the funds’ assets were sold and Bear Stearns extended a $1.6bn secured loan to bail out creditors to the less levered of the two funds.
Warren Spector, co-president, is widely viewed as a possible successor to James Cayne, who is 73. However, Mr Spector was ultimately responsible for the subprime funds.
Reporting by Ben White, Saskia Scholtes and Anuj Gangahar in New York and James Mackintosh in London
By FT Reporters
Copyright The Financial Times Limited 2007
Published: July 17 2007 23:44 | Last updated: July 18 2007 01:33
Bear Stearns on Tuesday told investors in two stricken hedge funds managed by the bank that one fund had lost all its value and the other had about nine cents remaining for every dollar invested following bad bets on the US subprime mortgage market.
The losses, especially for the less leveraged of the two funds, were worse than investors expected.
“They are a big investment house. They are supposed to be professional,” said one fund of funds executive. “There is nothing to do now except maybe go shoot the guy who did it.”
Bear Stearns declined to comment. The two funds at one point had more than $20bn in investments, much of it using borrowed money.
The funds were heavily exposed to the troubled subprime mortgage market through complex debt securities known as collateralised debt obligations (CDOs). Amid a sharp increase in late payments and defaults on subprime home loans – made to borrowers with patchy credit histories – the funds ran aground as creditors made margin calls.
The near collapse of the two funds was an embarrassment to Bear Stearns, a leader in the packaging and sale of mortgage-backed securities.
Bear Stearns shares are off about 9 per cent since the trouble at the two funds came to light and the price of buying insurance against a default by the bank on its bonds has increased. Bear Stearns’ stock price was about 2 per cent lower at $137.20 in after-hours trade.
In addition to risks associated with a $1.4bn loan extended by Bear Stearns to support the funds, investors appear concerned that the bank would have trouble expanding its asset management business.
The business is still relatively small, but it has been growing fast.
In the second quarter, revenues soared eight-fold to $184m, about 7 per cent of the group total, thanks largely to a jump in performance fees.
CDOs, which package portfolios of debt such as mortgages into high-yielding securities, are rarely traded and difficult to value.
News of the near collapse of the two funds in early June and the threat of large fire sales of CDO assets sparked fears of a widespread repricing of similar instruments.
In the event, only a fraction of the funds’ assets were sold and Bear Stearns extended a $1.6bn secured loan to bail out creditors to the less levered of the two funds.
Warren Spector, co-president, is widely viewed as a possible successor to James Cayne, who is 73. However, Mr Spector was ultimately responsible for the subprime funds.
Reporting by Ben White, Saskia Scholtes and Anuj Gangahar in New York and James Mackintosh in London
posted by Carlos T Mock at 8:49 AM
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