A day after managers of a troubled internal hedge fund at Bear Stearns Cos. presented lenders with a last-ditch plan to reinvigorate the fund with additional financing, creditor Merrill Lynch & Co. pushed forward with plans to sell hundreds of millions of dollars in collateral assets out of the fund, said traders late Tuesday.
Merrill has indicated plans to sell off at least $850 million worth of collateral assets, mostly mortgage-related securities, Wednesday afternoon, according to documents reviewed by the Wall Street Journal. Those plans come amid efforts by the Bear fund managers to stave off liquidation by lining up $1.5 billion in new credit from parent company Bear Stearns and an additional $500 million in new equity capital. The managers spent Tuesday trying to finalize those financing arrangements.
An auction Wednesday could come as a blow to the fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund, because it could spur additional sales of collateral assets from other worried dealers. A string of asset seizures would likely force the dissolution of the fund, and could effectively drag down the prices of similar securities in the market, creating losses at other Wall Street firms. On the other hand, a handful of successful trades might still pull the troubled fund out of harm's way, and Merrill could yet change its plans, as it has done once before.
Merrill is one of the primary broker dealers that deal directly with the government. That means their trading desk is large and very connected. Right now there are tons of calls going out to accounts about this sale.
However, it could also backfire on Merrill if they don't get the prices they want. If that happens, expect problems to ripple through the mortgage markets.