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This is so beautiful I'm going to post it in 2 threads.
| quote: | By Yalman Onaran
July 18 (Bloomberg) -- Bear Stearns Cos. told investors in
its two failed hedge funds that they'll get little if any money
back after ``unprecedented declines'' in the value of securities
used to bet on subprime mortgages.
``This is a watershed,'' said Sean Egan, managing director
of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``A leading
player, which has honed a reputation as a sage investor in
mortgage securities, has faltered. It begs the question of how
other market participants have fared.''
Estimates show there is ``effectively no value left'' in the
High-Grade Structured Credit Strategies Enhanced Leverage Fund
and ``very little value left'' in the High-Grade Structured
Credit Strategies Fund, Bear Stearns said in a two-page letter.
The second fund still has ``sufficient assets'' to cover the $1.4
billion it owes Bear Stearns, which as a creditor gets paid back
first, according to the letter, obtained yesterday by Bloomberg
News from a person involved in the matter.
Bear Stearns, the fifth-largest U.S. securities firm,
provided the second fund with $1.6 billion of emergency funding
last month in the biggest hedge fund bailout since the collapse
of Long-Term Capital Management LP in 1998. The losses its
clients now face underscore the severity of the shakeout in the
market for collateralized debt obligations, or CDOs, investment
vehicles that repackage bonds, loans, derivatives and other CDOs
into new securities.
Bear Stearns spokeswoman Elizabeth Ventura declined to
comment.
Risk Soars
Shares of Bear Stearns fell $1.37 to $138.54 at 2:53 p.m. in
New York Stock Exchange composite trading, extending their
decline this year to 15 percent.
The cost of insuring $10 million of Bear Stearns corporate
bonds for five years jumped as much as $2,000 to $76,000, before
easing to $71,000, according to credit-default swap prices
provided by broker Phoenix Partners Group in New York.
Prices for other Wall Street firms' credit default contracts
also rose, led by Lehman Brothers Holdings Inc., the largest
underwriter of U.S. mortgage bonds. Lehman's default swap surged
$10,000 to $70,000.
The rise was stoked by concerns that Lehman faced greater
potential losses from subprime mortgages than previously
disclosed, traders said. Lehman spokeswoman Kerrie Cohen denied
the speculation, calling it ``unfounded.''
Cioffi's Strategy
More broadly, the risk of owning corporate bonds soared to
the highest in two years in Europe and rose in the U.S., credit-
default swap prices show.
Ralph Cioffi, the 22-year Bear Stearns veteran who managed
the two funds, sought to minimize risk by investing in the top-
rated portions of CDOs. Under Cioffi, 51, the funds also borrowed
money in an effort to boost returns. Instead, as defaults surged
on subprime mortgages, they grappled with ``unprecedented
declines'' in the values of AAA and AA securities, Bear Stearns
said in the letter.
``That has implications for credit weakness in the next
several days and weeks,'' said Peter Plaut, an analyst at New
York-based hedge fund Sanno Point Capital Management. ``There's
going to be more risk aversion.''
In an interview with the New York Times published on June
29, Bear Stearns Chief Executive Officer James E. ``Jimmy'' Cayne
said the debacle was a ``body blow of massive proportion.''
Sanford C. Bernstein & Co. analyst Brad Hintz estimated in a July
16 report that Bear Stearns's profit may decline 6.8 percent this
year as the firm restricts lending to hedge funds and declining
demand for mortgage bonds cuts trading revenue.
`Dear Client'
Hedge funds are private, largely unregulated pools of
capital whose managers participate substantially in any gains on
the money invested.
Today's letter, addressed ``Dear Client of Bear, Stearns &
Co. Inc.,'' recounts how the firm's two funds unraveled in less
than a month. In early June, faced with redemption requests from
investors and margin calls from lenders, the funds were forced to
sell assets. When those efforts failed to raise enough cash,
creditors moved to seize collateral or terminate financing.
The fund that now has nothing left for investors, known as
the enhanced fund, had $638 million of capital as of March 31,
according to performance reports sent to clients at the time. It
also borrowed about $11 billion to make bigger bets. Bear Stearns
said last week that the fund's debt had dropped to $600 million.
Tremont, Paradigm
The larger fund, which had $925 million of capital in March,
is down about 91 percent this year, according to a person with
direct knowledge of the performance, who declined to be
identified because the figures aren't public. It borrowed almost
$9 billion, and its remaining debt was taken over by Bear Stearns
in the bailout.
As prices of CDOs slumped, lenders demanded more collateral,
forcing the funds to sell assets and mark down the value of their
investments, creating a vicious cycle. The leverage magnified the
losses, wiping out investors' capital, Michael Hecht, an analyst
at Bank of America Corp., said today in a report. Hecht doesn't
expect the funds' losses to reduce Bear Stearns's shareholders'
equity and recommends buying the stock.
Investors in the second fund include Tremont Capital
Management Inc. and Paradigm Cos., two firms that place client
money with other hedge fund managers. Together, they have more
than $9 million at risk.
`Reputational Risk'
Bear Stearns itself invested about $35 million in the funds,
Chief Financial Officer Samuel Molinaro said on a June 22
conference call. The firm bailed out the larger pool to keep
lenders from auctioning off assets and driving down prices.
``For them to put up so much capital, just for reputational
risk, wouldn't make sense unless they believe they won't lose
money on it,'' said Erin Archer, an analyst at Minneapolis-based
Thrivent Financial for Lutherans, which owns about 200,000 Bear
Stearns shares.
Merrill Lynch & Co., which was among the creditors to seize
collateral, considers its ``exposure'' to be ``limited'' and
``appropriately marked'' to market, Chief Financial Officer Jeff
Edwards said on a conference call yesterday. Merrill reported a
31 percent increase in second-quarter profit, even after revenue
in the business that includes mortgages and CDOs declined.
Mortgage Markdowns
Douglas Sipkin, an analyst at Wachovia Corp., said today in
a note to clients that most securities firms probably reduced the
value of their mortgage assets during the first half of the year.
Any holders that continue to overvalue CDOs and subprime bonds
will have to mark them down to market this quarter, he wrote.
Sipkin rates Bear Stearns shares ``market perform.''
Many holders of CDO securities don't have to mark the
positions to market regularly, according to a report yesterday by
Bear Stearns analyst Gyan Sinha. About three-quarters of ``super-
senior'' AAA classes were bought by monoline insurers, while
about half of other AAAs and AAs are held by commercial banks in
financing vehicles, and another 10 to 15 percent are with
insurers. Those holders could be forced to sell and realize any
lost value if the securities are downgraded, Sinha said.
Bear Stearns shook up its asset-management unit last month,
as the losses mounted. The firm ousted Richard Marin as head of
the division, replacing him with Lehman Brothers Holdings Inc.
Vice Chairman Jeffrey Lane, 65. Tom Marano, 45, Bear Stearns's
top mortgage trader, moved over to asset management to help sell
the fund assets. Marin, 53, and Cioffi remain advisers to the
firm.
In the letter, Bear Stearns said it made such moves to
``restore investor confidence'' in its asset-management division.
``Let us take this opportunity to reconfirm that the Bear
Stearns franchise is financially strong and committed to meeting
your investment needs,'' the letter reads. ``Our highest priority
is to continue to earn your trust and confidence every day.'' |
I smell a few lawsuits. But hey, at least Bear gets their $1.4B repo loan back, right? Screw the investors! lol...
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Bought and sold some shit today. That helped I guess. Sold off Kraft Foods, Coca Cola and Sun Microsystems and bought some of those cheap stocks Krypton was talking about 
Anyways, here's what I got. Anybody care to comment on my portfolio ?
I started off on a fairly safe bet. I sold off Sun Microsystems, Coca Cola, Kraft Foods because their share value has been steadily declining over the past 6 months. No point in keeping them cause they will probably keep on reducing in value. I bought the low value "five star" stocks you mentioned a couple of pages back. Hopefully they will give me good returns. 
