Bear’s Funds’ Problems: Not All That Big


details are emerging on the potential losses at Bear Stearns’ troubled hedge

funds, or the lack thereof.

Barclays had the lion’s share of the exposure to the newer, more highly leveraged

fund – in theory. But in practice, it turns out, that exposure was much


The new fund was created after Barclays Bank in London agreed to provide

a financing facility of up to three times investor capital through an over-the-counter

derivative, according to people familiar with the structure…

Enhanced Leverage had attracted $638m from investors by the end of March,

which it geared up more than 10 times using a mixture of repo financing and

the Barclays facility, documents sent to investors show.

Barclays said its exposure was “not material”, and it is understood

Bear did not draw down all the financing facility provided by the bank because

it was cheaper to borrow through repos.

Interestingly, the more highly-levered fund was also more conservative in its

choice of investments:

All of the long positions were in bonds and bank loans with AAA or AA credit

ratings, which have first call on assets and are supposedly safe…

The older fund was the larger, with $925m from investors, but it also had

a larger exposure to lower-rated bonds.

The more we learn about what happened at Bear Stearns, the more overblown all

the worries seem to have been. Yes, Barclays had a huge credit line with one

of the funds – but no, most of it wasn’t drawn down. Yes, many of the

securities that fund invested in were backed by subprime mortgages – but

no, they weren’t particularly risky securities. Yes, there would be huge losses

if the fund was forced to liquidate – but that’s a CDO liquidity problem,

not a broader credit problem.

And guess what? Bear Stearns stock is up

$6 from its low on Monday. Yet another sign that people should be breathing

more easily now.

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