Bear Stearns: Loan 'Secured'

Bear Stearns (BSC) says the big loan it's making to bail out a pair of failing hedge funds is "adequately secured."

The big New York brokerage firm set plans Friday to provide a $3.2 billion life buoy to a pair of failing hedge funds. The funds are being overwhelmed by losses on esoteric securities tied to subprime home loans.

During a midday conference call, CFO Samuel Molinaro Jr. said the bailout will take the form of a credit facility that will replace current secured financing for the fund. Bear's credit facility will provide much-need liquidity for the hedge funds known as High-Grade Structured Credit Strategies Enhanced Leverage Fund and High-Grade Structured Credit Strategies Fund, and allow the highly leveraged funds to unwind in an orderly fashion.

"Providing a stable financing source to the fund would give [the funds] the ability to meet the current liquidity requirements which are being imposed," Molinaro commented.

Molinaro says he believes that the bleeding that the fund has felt has not affected the firm directly and adds that he believes the damage, which many observers feared could lead to a widespread contagion, has largely been contained.

The life preserver that the New York-based investment bank is providing to its related hedge funds is meant to stave off a massive repricing of mortgage securities in the market. A wholesale liquidation could have sent shivers through the broader financial markets.

Molinaro said the troubles for the fund were wrought in large part from "the simple fact that values are declining and margin calls were coming in."

If not for Bear's loans, creditors including JPMorgan(JPM) and Lehman Brothers (LEH) were preparing to put some of the collateral tied to the funds up for sale.

"We did not envision a market dislocation of this degree and a liquidity drain," said Molinaro of the conditions that let to the big slipup in the hedge fund performance.

"Our mortgage business has really not been affected by this," he added. "Our mortgage business is still working in a very effective way. We feel that we have adequate controls in place.

"The simple point is that they are investing in an asset class that went through severe distress," Molinaro said responding to an analyst question.

The fund's stumbles have been a black eye to the Bear Stearns image, but the chief financial officer says the financial institution is trying to recover. "We are trying to stabilize this and move forward," Molinaro notes.

Bear has been deeply mired in the subprime debt business, which has dragged down its share price over the past few months even more so than its banking peers. The company's mortgage platform is the second largest U.S. mortgage originator.

The hedge funds, run by Ralph Cioffi, have been in operation for about 10 months. The funds invest in collateralized debt obligations, mortgage securities that have been structured as bonds and pooled for resale to investors.

Bear shares fell $2.22 to $143.59.

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