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Bear Stearns admits two subprime mortgage funds are worthless

Section: Daily Dispatches

By Joey Bel Bruno
Associated Press
Tuesday, July 17, 2007

NEW YORK -- Bear Stearns Cos. told clients Tuesday that a meltdown in the subprime mortgage market has made the assets from two of its flagship hedge funds almost worthless.

Both funds were squeezed after Bear Stearns made wrong-way bets on the home mortgage market and was caught as loans to risky investors began to default. The assets in one of the funds are essentially worthless, while another is worth 9 percent of its value at the end of April, according to a document obtained by The Associated Press.

Bear Stearns, the nation's fifth-largest investment bank, began disclosing in March that the two hedge funds had sustained heavy losses tied to subprime loans extended to risky borrowers. At the time, its High-Grade Structured Credit Enhanced Leveraged Fund was worth about $638 million -- and now has no value.

Meanwhile, the larger and less-leveraged High-Grade Structured Credit Fund lost 91 percent of its value. It was worth about $925 million before taking on losses in March.

"In light of these returns, we will seek an orderly wind-down of the funds over time," Bear Stearns said in a letter that will be sent to clients who might have questions about the funds. "This is a difficult development for investors in these funds, and it is certainly uncharacteristic of Bear Stearns Asset Management overall strong record of performance."

A spokeswoman for Bear Stearns didn't return calls seeking comment.

In June, Bear Stearns said it would spend $1.6 billion to bail out the High-Grade Structured Credit fund. About $1.4 billion of that remains outstanding, Bear Stearns said in the letter.

Meanwhile, the investment bank has been trying to unwind about $1.1 billion from the other fund.

It said in the note to clients that the fund's "performance, in part, reflects the unprecedented declines in the valuation of a number of highly rated securities" and that it "has taken action to restore investor confidence."

Bear Stearns, considered the pre-eminent Wall Street firm dealing in mortgage-backed securities, won a reprieve from lenders clamoring for more collateral. Wall Street firms like Merrill Lynch & Co. and JPMorgan Chase & Co. decided to hold back on auctioning off fund assets.

James Cayne, Bear's longtime chief executive, has said the bailout would not have "any material adverse effect" on the company's business.

The problems began when the funds' assets -- mostly securities backed by risky mortgages to investors with poor credit, known as subprime loans -- lost value amid rising defaults in a persistent housing slump.

Defaults have been rising quickly, and a large volume of subprime loans with variable interest rates are slated to reset at higher levels in the next two years.

Meanwhile, securities regulators have started a dozen inquiries related to how hedge funds place a value on the complex securities called collateralized debt obligations, many of which are underpinned by subprime loans.

Bear Stearns shares fell $5.41, or 3.9 percent, to $134.50 in after-hours trading. The shares had closed down 40 cents at $139.91.

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