The Big Bear Bailout

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In the largest hedge fund bailout since the ‘Fund that shall not be Named’ in 1998, Bear Stearns is providing $3.2bn in loans to rescue its High-Grade Structured Credit Strategies Fund, which has lost about 10% this year. The Bear loans will replace the loans extended by the major banks, some of which exceed $1bn per bank.
Bear will not be rescuing its High-Grade Structured Credit Strategies Enhanced Leverage Fund, which is significantly suckier than the fund that’s getting rescued, having lost 20%+ this year. As the name suggests, the HGSCSEL Fund is more leveraged (the buzzword is “enhanced”) than its Cioffi managed cohort. Creditors extended about $9bn to the Bear funds, which made $11bn worth of bets on CDOs. The amount extended to the Bear funds is far more than the $3.5bn extended to LTCM, although Bear’s bailout is a bit more organic and a lot less potentially apocalyptic, to say the least.
Major banks are taking heat over the amount of low-value or illiquid exposure to the Bear funds. One of the hardest hit banks could be Barclays. Several sources are reporting that Barclays committed $1.2bn linked to the highest risk “sludge” tier of subprime loans, which is way more than the $300mm or so in exposure originally reported. Barclays could lose almost $500mm in all, CNBC’s Charlie Gasparino reports. Merrill put $850mm up for auction in collateralized assets from its loans, but could only dump $100mm worth. Merrill doesn’t expect to be able to dump the remaining assets any time soon.
In other developments (another Gasparino report) Cantor Fitzgerald, according to itself, has been able to sell off its seized collateralized assts at face value, and not 10-20 cents on the dollar as earlier rumors suggested. There is still no outside verification of this, however.
So far the estimated extent of the recent subprime fallout is up to $25bn in CDO losses, according to analysts at Lehman.
Barclays Capital exposed to embattled Bear Stearns hedge funds [Forbes]
Bear Stearns Plans $3.2 Billion Hedge Fund Bailout [Bloomberg]
Bear Bailout [CNBC]