Bear Bailout Questioned

Some wonder if saving two troubled funds is wise.
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Bear Stearns


may throw a $3.2 billion lifebuoy to a pair of failing hedge funds that are being overwhelmed by esoteric securities tied to subprime.

The Bear hedge funds, known as High-Grade Structured Credit Strategies Enhanced Leverage Fund and High-Grade Structured Credit Strategies Fund, have been the talk of Wall Street because they have lost a significant portion of their value. Creditors including

Merrill Lynch


have been closing in on the funds.

But CEO Jimmy Cayne, who is said to have a portion of his cash tied to the funds, does not want to see them fail. The last-minute bailout, which is reported by


and cites people familiar with the bank, is reminiscent of one conducted for Long Term Capital Management when it collapsed in 1998 on bad currency bets.

A call to a Bear Stearns spokesman was not immediately returned.

If not for Bear, creditors including


(JPM) - Get Report


Lehman Brothers


were to put some of the collateral tied to the funds up for sale. The moves were looming even as the manager of the funds, Ralph Cioffi, has been trying to buy time to restructure the funds, which invest in collateralized debt obligations and mortgage securities that have been structured as bonds and pooled, and meet lenders' margin calls.

But some question the New York investment bank's effort to salvage the failing funds. Richard Bove, analyst at Punk Ziegel, believes the bailout is a poor use of Bear's capital.

"The investor in Bear Stearns' stock is faced with the fact that the company may be lending money at below the rate it earns on capital into an entity where there is nogood way to determinate value of its assets," Bove commented in an analyst note.

"It is also important to understand that $3.2 billion, if this is the right number, is 24.8% of Bear Stearns' common equity," he warns.

The Bear funds have drawn a lot of attention because they have made investments in esoteric securities, backed largely by borrowers with poor credit, that do not frequently trade. The sale of the fund's holdings could cause a significant repricing in the overall market because it will give an indication of where to value these hard-to-parse securities.

A repricing is a scary notion because subprime has been a mess for investors, and the value of debt with subprime mortgage ties is much lower than it was several months ago. Much of the fervor and vigilance over the Bear funds is the fear that the failure of the hedge funds will cause a contagion among other CDO managers and hedge fund investors.