Ths news wasn't new but based on bailout stories earlier may have provided a jolt. Notice this part...
"They haven't collapsed in price because they are often mismarked or just don't get traded," said one hedge fund executive who has evaluated the Bear fund's positions. "That is going to change in a big way today at 4 p.m., when the [Merrill] auction ends."
NEWS: MERRILL DITCHES $850M HEDGE FUND STAKE
By RODDY BOYD
June 20, 2007 -- The end came yesterday for a Bear Stearns hedge fund that had been teetering on the edge of solvency for a week, when Merrill Lynch announced that an $850 million auction designed to recoup some of its loans to the fund was back on.
The fate of Bear's High- Grade Structured Credit Strategies Enhanced Leverage fund - forced to suspend redemptions after reporting a 23 percent loss - had been the focus of intense negotiations between Bear and its biggest rivals. While sporting $600 million under management, the Bear fund was massively levered, bringing its portfolio size to over $6 billion.
On Monday, Merrill delayed an auction in order to give Bear and its adviser Blackstone a chance to put together a bailout plan. Bear's plan, presented yesterday afternoon, had too many strings attached for the fund's lenders. The firm offered to pump $1.5 billion in life-saving cash into the fund, but only if its creditors agreed to hold off on margin calls and chip in another $500 million.
A Bear spokesman declined comment.
The bond market's most battered players - the hedge funds and trading desks specializing in mortgage-backed securities - now have to handle a total of $2 billion or more hitting a market that is still licking its wounds from the first burst of sub-prime woes.
The sales are likely to force a serious re-pricing of billions of dollars worth of highly complex and often illiquid securities called collateralized debt obligations, or bonds made from other bonds. Held by both Wall Street firms and hedge funds, the CDOs stocked with sub-prime bonds have not collapsed in price alongside other sub-prime bonds. This will hurt returns at hedge funds and profits at Wall Street trading desks.
"They haven't collapsed in price because they are often mismarked or just don't get traded," said one hedge fund executive who has evaluated the Bear fund's positions. "That is going to change in a big way today at 4 p.m., when the [Merrill] auction ends."
Bear's fund, led by Ralph Cioffi, not only made a massive bet on sub-prime mortgages, but did so in a singularly dangerous manner with respect to its leverage. The auction list, examined by The Post, shows the fund used borrowed money to buy the CDOs, using leverage of 10-to-1 or 15-to-1 times its capital. This made their positions massive at a time when few funds or trading desks had any interest in buying or selling this paper.
Lehman Brothers and Credit Suisse voted with their feet ahead of Merrill and auctioned off smaller amounts of Bear's portfolio yesterday afternoon, with Lehman taking 50 cents on the dollar for some bonds. Merrill's traders, according to several hedge fund managers, would gladly take that much.
Shares in Bear fell $1.16 to $146.79. Merrill's stock rose 4 cents to $90.04 a share.
http://www.nypost.co..._roddy_boyd.htm
