Friday, June 22, 2007

Bear to lend $3.2 bln to one of its hedge funds But bank doesn't lend money to other, more leveraged, fund

WOW! The $3.2 billion bail out was only for one (the less risky!) hedge fund.... Suddenly almost over night nobody wants to hold this ticking time bomb in his hands/books. But somebody has to..... This could be the story that finally brings risk premiums back to the market....At least for Bear Sterns :-)!

Donnerwetter! Die 3,2 mrd$ Kreditspritze für den in Schieflage geratenen Bear Stearns Hedge Fond betrifft nur den nicht ganz so riskant aufgestellten Fond. Es scheint fast so als wolle plötzlich über Nacht keiner mehr diese bereits seit Monaten tickenden Bomben in den Büchern haben. Warum diese Erkenntnis so lange gedauert hat ist mir schleierhaft. Ich denke diese Geschichte hat das Potential endlich die Risikobereitschaft auf ein normales Niveau zurückzufahren. Das sollte in jedem Fall für Bear Stearns gelten :-)!

SAN FRANCISCO (MarketWatch) -- Bear Stearns Cos. unveiled a rescue plan on Friday after a hedge fund it runs was hit hard by trading billions of dollars worth of mortgage derivatives this year.

But the bank didn't offer much help to another of its struggling hedge funds which borrowed more money to magnify its bets in the same market. Both funds control roughly $10 billion in mortgage-related assets.
Bear said on Friday that it has offered to lend up to $3.2 billion to the High-Grade Structured Credit Fund to ease the pressure of margin calls and pay off other creditors. The new loan will help the High-Grade fund reduce its leverage in an "orderly" way, the bank added.
The more leveraged High Grade Structured Credit Enhanced Leveraged Fund didn't get a loan, but Bear said its asset-management division will continue to work with creditors and counterparties to repay current outside lenders and free up cash. ....
Both funds, run by Bear mortgage veteran Ralph Cioffi, lost money in March and April when big mortgage bets went awry. The losses came after 14 consecutive quarters of gains, Bear Chief Financial Officer Sam Molinaro said during a conference call with analysts on Friday....
> That´s the beauty of a 10 or 20:1 leverage....... SCHADENFREUDE!
> Das ist doch das schöne am 10 bis 20 :1 gehebelten Einsatz...SCHADENFREUDE!

"When you have a situation like this, it puts a lot of pressure on asset values and spreads in the market," Bear's Molinaro said during the bank's conference call on Friday. "It appears to be relatively contained from our perspective. But we can only see what we're doing."

>It seems like there is no statement out there without "contained".....

> Jedesmal wenn Kommentare zu Problembereichen abgegeben werden ist selbstverständlich alles "contained" und damit nicht weiter schlimm......

The value of the mortgage-related assets held by the funds has dropped "significantly" during the past two weeks because the market was expecting the funds to be forced into selling assets to raise cash, Molinaro said.

"This will take several months to work out," he told analysts on the call. "Hopefully markets will stabilize relatively quickly once we eliminate the overhang of these securities potentially being sold into the market."

Loan 'secure'
Molinaro also said the loan Bear Stearns is extending to its High Grade hedge fund is "secure," noting that there's a high probability that it will be repaid.

"We are over-collateralized by a reasonable level," he added. That means there's more than a minimum amount of assets backing the loan. Borrowers in the debt and structured-finance markets often include more collateral than is required to get a better credit rating.
Still, Molinaro warned that further significant declines in the value of the collateral could cause a loss on the loan.

Enhanced fund
Molinaro was less forthcoming about plans for the Enhanced fund.

Both hedge funds invested in similar types of mortgage assets, including AAA and AA rated collateralized debt obligations, Molinaro said.

But the Enhanced fund had a layer of "mezzanine" assets, which provided the extra leverage, he explained. Mezzanine tranches of CDOs and mortgage-backed securities are lower-rated and riskier than some other parts of these structures. But they're not the riskiest parts.

There have been sales of assets from the Enhanced fund and there will be more in future, but Molinaro said Bear Stearns is "hoping to do this without forcing massive liquidations in the marketplace."

> Too late, the gates are now open.....

> Das dürfte ein frommer Wunsch sein. Die Tore sind geöffnet......

"We're working with all counterparties to effectuate as orderly a de-leveraging as we can with an eye to preserving as much capital as possible," he added.

Bear's Molinaro said on Friday that there's been a "dramatic widening (of spreads) in all of those pieces across the capital structure."

When spreads widen, that indicates investors have become more risk-averse and demand higher rates in return for holding riskier assets.

The hedge funds also ran into trouble because they couldn't meet investor redemption requests and margin calls, which came in much quicker than expected, Molinaro explained.

"When you have difficulty raising liquidity to meet margins calls, that causes more margin calls," he said. "The inability to satisfy margin calls from clients triggered further declines in values."
"These two funds invested in an asset class that went through a period of severe distress," he concluded. "Controls on the asset management side did not envision market dislocation of this magnitude and this kind of liquidity drain
> Remember this kind of story when somebody wants to argue that financials and investmentbanks should have higher multiples.........
> Diese Geschichte sollte man sich immer in Erinnerung rufen wenn gefordert wird das Finanzwerte und besonders Investmentbanken höhere KGV´s zuständen.......
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