The Wall Street Journal reports another investment fund of Bear Stearns is in trouble. This time subprime is not the culprit.
Bear Stearns, its reputation already dented after two of its hedge funds that bet heavily on securities connected to risky home loans blew up in June, has prevented investors from taking their money from another fund that put about $850 million into mortgage investments.
In recent weeks, as the housing market continued to weaken and trading firms began to price many mortgage investments at discounted levels, Bear executives realized their Asset-Backed Securities Fund was facing a rough July, said people familiar with their thinking.
Unlike Bear’s other two funds, these people said, the asset-backed fund borrowed no capital and had practically no exposure to subprime mortgages, as home loans extended to people with weak credit are known. But a combination of markdowns on a broad range of mortgages and a series of refund requests could force the fund out of business eventually, according to one person familiar with the situation.
A spokesman for the firm disputes that, however. “There are no plans to shut down the fund,” said Russell Sherman, a Bear spokesman. “We believe the fund portfolio is well positioned to wait out the market uncertainty. And we believe by suspending redemptions, we can ensure the best long-term results for our investors. We don’t believe it’s prudent or in the interest of our investors to sell assets in this current market environment.”
The bid currently quoted on many bonds is pennies on the dollar. There are virtually no trades taking place on a huge portion of the asset-backed market. Everybody knows that bonds are materially impaired, but the degree is unknown and the time frame within which a cure-rate can be established is 12+months away.
Liquidity is the name of the game right now; without it, the investment has a value of zero (or thereabouts). Those that survive will live to see the second inning, but that is no guarantee of a favorable outcome.
This can only get worse. Assume that the $2.5 trillion of subslime debt outstanding is worth 75 cents on the dollar (yeah right), and also imagine that the mortgages were funded with owners’ capital of $500billion. We are talking about a 100% loss in the equity portion and a $125billion loss to the lenders - yet we have seen only the tip of the iceberg in terms of writeoffs and public ownership of these impairments. This Bear Stearns fund is one of hundreds that is materially impaired. It’s hard for managers to even speak about their potential loss when the bid/ask spread is literally 50cents per $1.
We are in a recession. Hard cash will have substantial purchasing power over the next 18 months!!!
Chinese will buy our mortgage backed bonds and save us all.