Bear Stearns Funds: Is Everything OK Now?

Well, that was quick. After throwing the entire financial media (if not the

actual markets) into a week-long tizzy, Bear Stearns seems to have found a way

to stabilize things without committing too much of its own money and without

subjecting its funds’ prime brokers to any losses. Can this really be true?

It’s really

hard to find a good overview of where we’re at with regard to the two Bear

Stearns funds. But on Monday, we started to hear that Bear’s $3.2 billion bailout

of its High-Grade Structured Credit Strategies Fund had been scaled

back to just $1.6 billion, and that the amount of money owed by the High-Grade

Structured Credit Enhanced Leveraged Fund had somehow managed to be reduced

from $7 billion to $1 billion. Now we’re getting official numbers out of Bear,

and it seems that the younger, riskier fund owes

$1.2 billion in total.

You could be forgiven for missing the good news amidst all the quotes and commentary:

the news on the impressive success of the newer fund in reducing its borrowings,

especially, has been buried deep in the coverage – in stark contrast to

the news of its $7 billion in debts when the troubles first started.

And it’s certainly far from clear how Bear managed to reduce the fund’s

borrowings so substantially, without putting in any extra capital itself. Was

there some kind of rocket science going on? Does the fund now have much more

embedded leverage than it did before? No one seems to be asking those questions.

But the chances that Bear’s lenders are going to suffer large losses now seem

to be greatly diminished – unless, of course, they’ve quietly accepted

some large losses already, and just not told anybody. Does anybody have any

clarity on all of this?

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