Bear's Hedge Fund Mess Is No Contagion

Facts on the table about Bear Stearns (BSC - commentary - Cramer's Take) and two ne'er-do-well hedge funds. Facts on the table about how bad this is for everyone involved.

There were two hedge funds housed at Bear Stearns that levered up. One levered up severely and bought some not-great paper. The other levered up super-severely and bought some really crummy paper.

The first one will be fine. It will be bailed out. And once cash is put into a fund like this, the pressure is off. You can meet redemptions you can meet the margin calls, so the fund will do fine and will delever over time.

The other one's bad, so bad that everyone will lose everything, and those who loaned to this fund could get dinged, too. There are some ripples, as there always are when a fund blows up. But this is about one-one hundredth the hit of Long Term Capital and the loans won't crush anybody.

The "good" fund, if you can call it, that has pretty much dumped much of the bad paper -- 2006 vintage loans that have a real bad reputation. What's left is paper trading for about 97 cents on the dollar.

The bad fund has lots of stuff trading at 50 cents on the dollar. As it goes belly-up, the lenders will try to divvy up what's left up and sell it. That's where the losses will come in.

Is this a big problem?

Eh.

Are there a lot of other heavily levered funds out there? There may be a bunch. Again, though, I urge you not to conclude that this is the end of the world. It's no more than the losses had by the banks and brokers that lent to Amaranth.

The toxic paper, again, is 2006 vintage. These two funds levered up at precisely the wrong time and bought all of this 2006 paper. Most funds are more diversified.

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