Interest Rate Roundup

Wednesday, July 18, 2007

How to turn $1.5 billion into virtually zilch -- in just over six months!

You too can apparently turn $1.5 billion in investments into virtually nothing ... in just over six months! All you have to do is invest in complex, structured, high-risk mortgage securities that are so opaque no one really knows what they're worth -- until they try to sell.

That seems to be what happened at those infamous mortgage hedge funds run by Bear Stearns, judging from multiple media reports this morning.

Here are some details from the New York Times ...

"Bear Stearns told clients in its two battered hedge funds late yesterday that their investments, worth an estimated $1.5 billion at the end of 2006, are almost entirely gone. In phone calls to anxious investors, Bear Stearns brokers reported yesterday that May and June had been devastating months for the portfolios.

"The more conservative fund, the High-Grade Structured Credit Strategies Fund, was down 91 percent by the end of June, investors were told. The High-Grade Structured Credit Strategies Enhanced Leverage Fund, which used extensive borrowings and assumed more risk, has no investor capital left, the firm said."

Here are a few from the Wall Street Journal ...

"Investors in two troubled Bear Stearns Cos. hedge funds that made big bets on subprime mortgages have been practically wiped out, the Wall Street firm said yesterday, in more evidence of the turmoil in this corner of the bond market.

"Bear said one of its funds was worth nothing and another worth less than a 10th of its value from a few months ago after its subprime trades went bad, according to a letter Bear circulated and to people briefed by the firm. The Wall Street investment bank -- known for its bond-trading savvy -- has had to put up $1.6 billion in rescue financing."

Here's another excerpt from the same WSJ piece:

"The net value of assets in Bear's highly indebted fund, High-Grade Structured Credit Strategies Enhanced Leverage Fund, is wiped out, according to people familiar with the matter, who were briefed on the contents of a late-afternoon call with brokers. The net value of assets in its other, larger, less-leveraged fund is roughly 9% of the value at the end of March, these people said. The net-asset value represents the value of an investor's holdings after debts have been paid.

"The funds invested in mortgage-backed securities and collateralized-debt obligations, which are bundles of bonds. The funds also made other bets in the debt markets through various derivative investments.

"In March, before their sharp losses, the enhanced-leverage fund had $638 million in investor money, while the other fund had $925 million."

And here is still more color from AP:

"Bear Stearns Cos. told clients Tuesday that a meltdown in the subprime mortgage market has made the assets from two of its flagship hedge funds almost worthless.

"Both funds were squeezed after Bear Stearns made wrong-way bets on the home mortgage market and was caught as loans to risky investors began to default. The assets in one of the funds are essentially worthless, while another is worth 9 percent of its value at the end of April, according to a document obtained by The Associated Press."


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