In spite of last-ditch efforts to renegotiate loan terms, a desperate scramble to keep them afloat and $1.6 billion in emergency funding, for investors in two collapsed Bear Stearns hedge funds, the wreck is total.
The New York-based investment bank told clients of the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage and the High-Grade Structured Credit Strategies funds that there’s no money left for them, after the funds were battered by what Bear called “unprecedented declines” in sub-prime mortgage market.
In a letter, addressed “Dear Client of Bear, Stearns & Co. Inc., Bear explained that the confluence of redemption requests and margin calls from lenders, both prompted by highly-publicized troubles in the sub-prime mortgage market, led to the collapse, in spite of the fact that the Bear funds were invested in triple-A rated securities.
The letter goes on to tell investors that the management shakeup at Bear Stearns Asset Management last month, in the wake of the disaster, was designed to “restore investor confidence.”
“Let us take this opportunity to reconfirm that the Bear Stearns franchise is financially strong and committed to meeting your investment needs,” it says. “Our highest priority is to continue to earn your trust and confidence every day.”
That is going to be one tall order for the firm. In the one-time $638 million Enhanced fund, there is “effectively no value left,” according to the letter, meaning investors will get nothing. Bear had already effectively left that fund—which had borrowed some $11 billion—for dead, refusing to intervene in its collapse. But investors in the regular high-grade fund aren’t much better off for Bear’s $1.6 billion emergency loan.
That fund has “very little value left,” as its value has declined by an astonishing 91% this year. It had borrowed some $9 billion—almost 10 times its $925 million in assets.
The good news, for Bear at least, is that the High-Grade Structured Credit Strategies Fund has “sufficient assets” to cover the $1.4 billion it still owes the bank. Investors in the fund are not so lucky.