Bear Gets Breathing Room

Merrill is waiting before it makes a move that could shut down a fund.
Publish date:

Merrill Lynch


has delayed plans to unload some $400 million in securities held as collateral in a

Bear Stearns


-run hedge fund.

The move could give Bear some breathing room as it seeks new money from investors to prop up a fund that has been hit hard by this spring's mortgage-market meltdown.

A Merrill spokeswoman was not able to comment and a Bear Stearns spokesman did not immediately return a call.

According to reports, including one on


, Merrill is expected to decide whether to sell the collateral that supports a mortgage-focused enhanced leverage fund, High Grade Structured Credit Strategies Enhanced Leveraged Fund. The fund has been feeling pain due to bad bets on mortgage borrowers with poor credit. Creditors have closed in on the highly leverage fund and investors have clamored to have their initial investments in the fund returned.

Late last Friday, Merrill seized $400 million in collateral a day after Bear Stearns successfully shopped nearly $4 billion in securities tied to Alt-A and subprime mortgage loans. Bear sold the loans in order to meet calls from lenders to cover the fund's short-interest investments -- where the vehicle had made bets that certain securities or indices would decline in value.

If Merrill sells the core assets that support the fund, it essentially means the dissolution of the enhanced leverage vehicle. Among other things, the fund will be unable to obtain additional leverage without the collateral.