Bear Stearns hedge funds may be wiped out

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I haven’t been doing a good job of following this important Wall Street story about Bear Stearns hedge fund that is in the process of melting down. The fund named the "High-Grade Structured Credit Strategies Enhanced Leverage Fund" faced liquidation as it could not handle margin calls from its primary investor, Merrill Lynch.

It’s a convoluted story but the basic fact is that the hedge fund is made up of subprime mortgage securities that are performing so poorly that the fund is going belly up. It is a high-profile meltdown for an internal Wall Street fund at one of the big boys.

If you wonder how far up the chain the subprime debacle would go read these articles – this goes straight to Wall Street and the power-players are either playing nice (Goldman Sachs, Bank of America) or demanding cash (Merrill Lynch).

Here’s a chronology of the events to date. Calculated Risk has done an amazing job synthesizing and covering this story. Follow the juicy details through the links below from oldest to newest:

Bear Fund is facing mortgage losses "A hedge fund managed by Bear Stearns Cos. is scrambling to sell large
amounts of mortgage securities, a setback for a Wall Street firm known
for its savvy debt-market trading."
Merrill seizes hedge fund assets "Concerned that an internal hedge fund at Bear Stearns Cos. wouldn’t be
able to meet a margin call, Merrill Lynch & Co., one of the fund’s
biggest lenders, seized $400 million of its assets and is preparing to
auction them off."
Bear-led fund gets reprieve "Lenders granted a beleaguered Bear Stearns Cos. hedge fund an additional day to finalize a last-ditch rescue plan …"
Merrill plans to sell of $850 million "I can’t recall a fund of this size ever being bailed out.
Liquidation is the usual outcome when a fund is down 25% to 30%, as
this one supposedly is. Of course, it might be down a lot more if real
prices were used."
Bear Stearns funds face shut down "Two big hedge funds at Bear Stearns Cos. moved toward the brink of closing down … as a bailout plan … fell apart …"

It will be interesting to see how far these Wall Street firms go in terms of either holding on to funds with big losses or pushing for large margin calls to other funds to recoup as many dollars as possible.

This roiling in the subprime securities on Wall Street does not portend a credit ease or market turn around in subprime any time soon. As more Wall Street firms eat losses, push loans back down through the system, and in general rewrite the rules for subprime lending there will be less credit available at less favorable terms for the foreseeable future.