Bear Stearns Bails Out Hedge Fund

Bear Stearns said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, raising concern about other funds that invested in bonds linked to subprime mortgages. The biggest bailout since Wall Street's 1998 rescue of Long-Term Capital Management signaled that the funds' main investments -- a type of bond known as a collateralized debt obligation (CDO) -- may be riskier than previously reckoned. Bear Stearns, the fifth-largest U.S. investment bank, said it would provide secured financing to its High-Grade Structured Credit Strategies Fund so the fund can sell assets in an orderly fashion. Bear also said a second fund (High-Grade Structured Credit Strategies Enhanced Leverage Fund) that took greater risk is still working out a restructuring plan with creditors. The two funds melted down after rising U.S. subprime mortgage defaults earlier this year depressed prices of CDOs, which were essentially repackaged portfolios of subprime home loans and were among the funds' main investments. Bear Stearns' High-Grade Structured Credit Strategies Fund was down about 5% so far this year through the end of April. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, meanwhile, which borrowed more to magnify potential returns and potential risk, was down 23% over the same period.

Another story that provides more of the numbers and paints a much clearer -- and much bleaker -- picture than above...

Merrill Lynch seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers, JPMorgan Chase and Cantor Fitzgerald also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations. Without assistance from his Wall Street peers, Bear Stearns was forced to salvage the healthier of the two funds, putting $3.2 billion of the firm's capital at risk in the biggest bailout since LTCM. Bear Stearns may dissolve the second fund after more than $600 million of investors' money dwindled to less than $200 million.