Two large hedge funds managed by investment bank and brokerage Bear Stearns are close to being shut down as their complex mortgage-related bets have soured, the Wall Street Journal reported.
The Journal said the two funds held over $20 billion of investments just a few weeks ago, mostly tied to risky securities linked to so-called subprime mortgages.
The two funds were identified by the Journal as the High Grade Structured Credit Strategies Enhanced Leverage Fund and the High Grade Structured Credit Strategies Fund.
Meanwhile, CNBC's Charlie Gasparino reported that the Securities and Exchange Commission is closely monitoring the unfolding hedge fund situation at Bear Stearns, though no formal inquiry has been announced. "If they (the SEC) feel this is getting much worse, you could see them go in and basically start an investigation and ask Bear Stearns, 'What did you know, and when did you know it, and when did you disclose that?'" Gasparino said.
The Journal report said Bear Stearns Bear Stearns Co Inc has been "besieged" by investors and lenders racing to pull their money out of the investment vehicles as the funds' performance has plummeted sharply.
Bear Stearns could not be reached for immediate comment by Agence France-Presse.
However, the financial group, told investors last week that its profits from mortgage-related trading had moderated significantly.
Bear isn't commenting because they are too busy trying to figure out what to do.
This developing situation leads to some really nasty possibilities.
1.) If Bear liquidates, what will they do with the securities? According to news reports, the fund invests in the less liquid equity pieces of CDO deals. Because these tranches are less liquid, other funds that invest in these securities will suddenly have an actual market price that may not reflect the value the fund has on its respective securities. In other words, the possibility of Bear selling assets could send some unpleasant waves through the industry.
2.) What will this do to mortgage funding -- which is already drying up from a variety of sources? Credit standards are already tightening. This situation may simply tightened the situation up more, making it that much harder for borrowers to acquire money for a loan.
