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.
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 Mr 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 $200m 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 $100m of the $850m 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 per cent $145.81.
It remained unclear on Thursday who, beyond the limited number of equity investors in the funds, had taken on any significant losses based on the funds’ problems.
Separately on Thursday, people close to the matter said Bear offered deals to another group of creditors including Deutsche Bank, Wachovia, Barclays and others.
Under that proposed deal, Bear said it would serve as the counterparty to $3.2bn in repurchase agreements between the banks to the less leveraged of the two troubled Bear hedge funds.
In return, the banks would have to agree not to seize and sell collateral held in the highly-leveraged fund for 90 days. It remained unclear last night whether any banks would accept any version of that deal.
Jack McCleary, head of asset-backed securities syndication at UBS said: “The market does good job of sniffing out leverage. Dealers will look at funds with similar positions to ensure valuations are appropriate.”
