Bear Stearns Bails Out Fund With Big Loan

Bear Stearns Bails Out Fund With Big Loan?mod=hpp_us_pageone Quo Status of the crisis Bear Stearns Cos.'s dramatic decision to lend as much as $3.2 billion to one of its two troubled hedge funds staves off the risk of a fund collapse that could have damaged its position as a major Wall Street bond player -- and had the potential to ripple through a jittery subprime-mortgage market. The events have kept Wall Street riveted for two weeks because a lot of firms are deeply invested in the subprime sector -- which caters to borrowers with weak credit, and which has suffered in the housing downturn as delinquent loans have spiked. The firm, whose move helps preserve its reputation, eventually might even make some money from the struggling investments. Even if Bear is able to salvage one of its funds, the crisis is a black eye for the brokerage house, a rough-around-the-edges firm run by 73-year-old James Cayne. It may also end up being a financially costly gambit for the firm, whose performance is already feeling the pinch of the subprime woes. Prior to yesterday, Bear's financial exposure to the funds was largely limited to $40 million invested by the firm and its executives. Yesterday, Bear described the move as a responsible one for the market. "We're trying to deal with this problem in as forthright a way as we possibly can," Market insghts The clash provides a case study on the challenges that some big hedge funds face in navigating a world full of complicated financial instruments. Over the past decade or so, financial markets have grown substantially and have spread globally, leading to sophisticated and complex ways to place bets, often with large amounts of leverage. The past several years have been noteworthy because there hasn't been a major system-shaking financial problem, but with that has come a worry -- among regulators, scholars, central bankers and others -- that has led an ever-increasing appetite for risk that is bound to end badly for someone. So far, none of the hiccups has had a system-rattling effect: No major institution has collapsed, stock and bond markets have been buoyant. But each new episode renews worries that it will be the one to have ripple effects. The Enhanced Leverage fund's losses were magnified by the significant amount of borrowing it used to finance its trades. As of Jan. 31, it had $699 million in investor capital, but had over $12 billion in investments. A month later, its investor capital had dropped to $667 million, but its bets on the market had increased to $15 billion, according to documents reviewed by the Journal. With the funds' standing deteriorating, Bear also saw an opportunity: come in with a larger loan to prevent a fire sale of their assets. Such a move could help stabilize the assets' perceived value and prevent widespread markdowns of similar securities that would hurt Bear and others. Mr. Spector worked the phones Thursday afternoon, reaching out to various CEOs and senior Wall Street executives, according to a person familiar with the matter. The upshot: save the less leveraged fund that had better-quality assets and let the other fund collapse.