Bear Stearns has called off a planned public offering for a fund holding complex debt securities backed by subprime mortgages, amid a crisis at two other related funds managed by Bear that created turmoil in the market for such risky assets, FT reports.
The two stricken hedge funds, both run by Ralph Cioffi, Bear Stearns’ managing director, had close ties with the proposed listing vehicle Everquest Financial, also managed by Cioffi.
The funds had transferred to Everquest the riskier parts of complex collateralised debt obligations, which package portfolios of debt into high-yielding securities, when the company was established last year, according to the IPO filing. Everquest secured a $200 million line of credit from Citigroup.
Lenders to the two Bear Stearns funds, including Merrill Lynch, Bank of America, JPMorgan and Goldman Sachs, rejected a proposed rescue plan earlier this week and instead seized CDO assets that it held as collateral against loans to the funds.
Merrill Lynch auctioned off some of the collateral while others negotiated private deals on the assets.
Merrill Lynch sold only $100 million of the $850 million of assets it put up for auction, and the bank has no plans to sell the remaining assets, according to a person familiar with the situation. CDOs are hard to value and investors speculated that prices may have fallen far below the banks’ expectations.
Bank officials said Bear Stearns itself has taken on little new risk and that the deals JPMorgan, Goldman, Bank of America and others were making to eliminate their exposure were with the hedge funds and not with Bear.
Investors seemed unconcerned about Bear taking on any additional risk, sending shares in the bank up nearly 2 percent to $145.81.