Bear Stearns told investors in two stricken hedge funds managed by the bank that one fund had lost all its value and the other had about nine cents remaining for every dollar invested following bad bets on the US subprime mortgage market, The Financial Times reports.
The losses, especially for the less leveraged of the two funds, were worse than investors expected.
The funds were heavily exposed to the troubled subprime mortgage market through complex debt securities known as collateralised debt obligations (CDOs). Amid a sharp increase in late payments and defaults on subprime home loans the funds ran aground as creditors made margin calls.
The near collapse of the two funds was an embarrassment to Bear Stearns, a leader in the packaging and sale of mortgage-backed securities.
In addition to risks associated with a $1.4 billion loan extended by Bear Stearns to support the funds, investors appear concerned that the bank would have trouble expanding its asset management business.
News of the near collapse of the two funds in early June and the threat of large fire sales of CDO assets sparked fears of a widespread repricing of similar instruments.
In the event, only a fraction of the funds’ assets were sold and Bear Stearns extended a $1.6 billion secured loan to bail out creditors to the less levered of the two funds.