Bear Stearns says 'no value' left in troubled hedge fund ($20 Bil goes "poof")

[UpInArms]

Source: AFP

NEW YORK (AFP) - Wall Street firm Bear Stearns has told investors in a hedge fund it manages that the fund's value has been wiped out following losses of billions of dollars tied to mortgage securities.

The investment bank and brokerage said in a letter to investors, obtained by AFP Wednesday, that its Enhanced Leverage Fund, has "no value left" while another hedge fund it runs had "very little value left."

The funds had previously amassed a total of over 20 billion dollars in investments, largely with money obtained from investors, some Bear Stearns executives and other banks, according to media reports.

<snip>

The two Bear Stearns' funds, which also included the High-Grade Fund, floundered after risky securities bets related to subprime mortgages soured.

Such mortgage loans, granted to Americans with patchy credit records, have been plagued in recent months by late payments and a rising tide of home foreclosures amid a year-long housing market slump.

Read more: http://news.yahoo.com/s/afp/20070718/bs_afp/uscompanyfinance

[frogcycle]

1. this is even better than the hummer story

most hedge funds are predatory beasts; the investors are high roller fat cats like Ken Lay

[A HERETIC I AM]

12. Why do you say they are "predatory beasts"?

I'm just curious why you say that. Are you aware that there are more than 8000 hedge funds? Are they all predatory? What is the difference between a hedge fund and a mutual fund? Are mutual funds predatory too?

[frogcycle]

16. many many hedge funds

target companies, sell them short, manipulate to drive the stock down, not infrequently destroy them, and make a bundle for their fat cat investors in the process. Predation at its finest.
Mutuals have a lot more oversight. Hedge funds are pretty much wildcatters - they are the rich republican's dream.

[A HERETIC I AM]

19. Actually, it's Private Equity firms that do what you are talking about.

Hedge funds are different.

http://en.wikipedia.org/wiki/Hedge_fund
http://www.investopedia.com/terms/h/hedgefund.asp

Private Equity;
http://en.wikipedia.org/wiki/Private_equity
http://www.investopedia.com/terms/p/privateequity.asp

[frogcycle]

23. neither of these says the hedge funds actually take action to push the stock down

but that they are savvy enough to bet on the drop. OK, fine. they aren't predators; they are vultures. I can't find the article I read some time back exposing some who actually worked to keep it going down, putting several out of business.
Maybe they'd have died anyway, and maybe that was just a few "rogue" traders. And maybe this is old news, and they (or new regulations) have cleaned up their act. So my generalization may have been too broad.

http://www.rgm.com/articles/thestreet2.html


A favorite short-selling strategy of hedge funds trying to score quick gains when troubled companies cut last-ditch financing deals with them could be in regulatory danger.

The trade in question involves so-called private investment in public equity transactions, deals known by the Wall Street acronym PIPEs, which have recently been the subject of an investigation by the Securities and Exchange Commission. Last spring, TheStreet.com reported that nearly 20 brokerages were questioned about PIPE investments by SEC agents concerned about their potential for abuse.

Within the past few weeks, people familiar with the inquiry say, a handful of hedge funds also have received subpoenas. While the PIPE market isn't well known, it is huge. About $14 billion will be raised in it this year by small companies, many of them cash-poor biotechs.

Among the issues being probed by regulators is the standard hedge fund practice of shorting the common stock of a company in which it is making a private investment, betting on the dilution to existing shareholders that occurs when a company sells extra stock at a discount. That dilution, as well as the potential for outright price manipulation, is why PIPE transactions are generally regarded a shady area of corporate finance, often hurting less-savvy investors.

http://money.cnn.com/2000/05/04/mutualfunds/q_funds_hedge/

Short is sweet


While some strategies such as Soros' macro-style Quantum Fund and Robertson's value-oriented fleet of funds are not faring well, short sellers who bet that a stock price will fall were able to capitalize on market gyrations.

graphic

"If short sellers didn't make money (in April), then I don't know what they were doing," said Meredith Jones, director of research at Van Hedge Fund Advisors International Inc. in Nashville, Tenn.

Rogers, portfolio manager of the Short Alpha Bear Fund, reported a 36.93 percent return for April. His portfolio consists mostly of large-cap stocks, but the key to his recent success is buying "distressed" stocks - - companies that fall short of earnings expectations, report cash flow problems or other negative news.

"We go in after the news, after a catalyst has been announced," said Rogers who declined to name any of the fund's holdings. He borrows a stock, hopes that it will fall, and buys it later at a cheaper price to make a profit on the difference. Year to date, the fund is up 72.06 percent, according to Hedgefund.net.

Bets to go down


While Short Alpha Bear is riding the wave of volatility now, it had a tough go of it in 1999 as the Nasdaq was up 86 percent for the year. In fact, short selling hedge funds in general were down 23.7 percent in 1999, according to Van Hedge Fund Advisors Index.

But Rogers, who started the fund in July 1999, thinks his short-selling strategy is well poised with the market, which he expects to go down.

[AngryAmish]

25. Mutual funds may not short a stock, hedge funds can

Back in the 60s or so people blamed mutual funds for causing downturns in individual stocks and the market. So laws and regulations were passed saying it was illegal to short sell an investment for a mutual fund.

Hedge funds were for sophisticated investors with lots of dough who could short sell. They can hedge their bets, thus the name. Not many protections for hedge fund investors because they are supposed to be sophisticated.

I happen to like people putting money in hedge funds for a number of reasons but I don't have any money invested with them.

[Vilis Veritas]

2. So who now owns all that defaulted property?

Peace

[UpInArms]

4. it amounts to another transfer of wealth

whatever the "buyer" put into the property has gone up in smoke and the loans have gone bad - the lender is now holding a piece of property that is "unique" (hahahahahaha - private joke) and basically worth about 50 percent less than the outstanding loan. Attorneys will be collecting fees for the foreclosure - newspapers will be collecting fees for the legal notices - county clerks will be collecting fees for the foreclosure notices - the lenders will be picking up the tab for the unpaid balances on the outstanding taxes - REO specialists will become the in vogue thing - and ....

oh, well....

all those property values in the neighborhoods will go "poof"!

and everyone will start to feel less "well off" because the value of the homes will once again not be so grand and those realtors will need to figure out how to convince everyone to keep the listings so that they can justify their 6% commissions...

and on and on

haven't we been here before?

[DeSwiss]

8. Yes we have....

...do you remember the shared-equity loans in the 80s and 90s before the stock market bubble???

[UpInArms]

14. those "loans" were called "participation" loans -

and RayGun lauded Don Dixon as the model for the new banker (see Vernon Savings and Loan Association's Donald Dixon

[Mojorabbit]

17. Probably some

pension funds. I hope I am wrong.

[salin]

22. article states that some of the investors in these funds... were indeed

large pension funds. But I don't think that this gives them any hold on the properties - just holding a lot of losses.

[A HERETIC I AM]

27. It doesn't give them any right to the real estate. They owned Bonds....

If you own a bond and it defaults, you get whatever the settlement is, maybe pennies on the dollar, maybe nothing, maybe 50%. You don't get a tangible part of the issuer.


Here is a video that explains how these securities are formed in the first place. From CNBC a week or so ago;


http://www.youtube.com/watch?v=0YNyn1XGyWg&

From this thread in the "Economy" forum;
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x26077

[salin]

45. so the question of "who is screwed" by this - includes

completely innocent workers whose pension fund managers greedily snapped up these risky and predatory investments.

[Zynx]

31. The funds didn't actually own the houses itself. The "property" for them was CDO bonds

As far as what happened to the hedge fund assets - they're literally obliterated between the markdown in what the CDO's were worth and creditors demanding money back that is significantly in excess of the original investments made in the funds, due to the funds taking out very high debt ratios.

If you put in $10,000,000 and the fund borrows $60,000,000 for a total fund value of $70,000,000 and it goes down to $55,000,000 and the creditors want their money back, there's only $55,000,000 in the fund, and the debt holders get paid first, not the equity guys (you) and not in a % of what the contribution was either. So you are never going to see your $10,000,000 again. Hence, zero value.

That's how hedge funds blow up. They don't drop to zero, it's just entirely due to their debt structures being unable to absorb big hits followed by their creditors wanting their money back. If they didn't borrow money, they'd be much less vulnerable.

A hedge fund doesn't need to borrow money, by the way. They're totally unregulated, so they can be anything. It's just that almost all of them do borrow money to magnify the dollar value of returns.

[Vilis Veritas]

32. Thank you for the clarity...I was not sure how those funds worked. nt

[Purveyor]

3. So with these 'losses', can we expect these investors to never pay another dime in

US federal taxes for the rest of their lives?

[UpInArms]

7. I think "carry forward" only works for 3 years

but someone else with more knowledge in that matter can correct my ignorance in a heartbeat :)

[A HERETIC I AM]

10. Carry forward on capital losses continues till the losses are used up but only at $3000/yr

http://www.irs.gov/taxtopics/tc409.html

Index for more info on this subject;
http://www.irs.gov/publications/p544/index.html

[WCGreen]

13. Carry back is only three years...

[UpInArms]

15. thanks! - it's been a long time since I dealt with any of

those issues

:)

[Double T]

5. This is just the beginning of the fallout from idiotic sub-prime mortgages.......

the world has become full of financial criminals and their greedy investors.

[A HERETIC I AM]

6. You're juuust a little slow on the "Latest Breaking" side of things. This was announced Tuesday eve

http://money.cnn.com/news/newsfeeds/articles/djf500/200707171734DOWJONESDJONLINE000700_FORTUNE5.htm

There were 2 other threads about this posted this morning.

[UpInArms]

11. ahhh - but because of the format of the links - those got

shoved off to "editorials and other articles" - this one qualifies itself as "news"

:shrug:

thanks!

:hi:

see the SMW for your "hat-tip" :D

[aquart]

9. I wouldn't trust word one from Bear Stearns.

They got off cheap with a 37-million dollar settlement the last time. That disgusting pittance was little more than two years' bonus for ONE of their executives.

[kurth]

18. "US Treasury officials have said the industry does not need regulation"

The Bush Treasury Department.

[salin]

21. just like the fed energy folks saying ENRON was hunky dory

[customerserviceguy]

20. Fringy stuff

that has nothing to do with legitimate capital formation, it's just legalized gambling with write offs. Hedge funds today, your 401K tomorrow...

[w4rma]

24. Cue the tiny violins. (nt)

[DemoTex]

26. Cue Petula Clark: "A Sign of the Times"

:nopity:

[antigop]

28. Hedge funds, private equity and the little guy (impact on pension funds)

http://prospect.org/cs/articles?article=hedges_private_equity_and_the_little_guy

>>
But corporate and government pension plans are increasingly investing in these funds, with money that was previously invested conservatively on behalf of their beneficiaries. Some states are now putting 20 percent or more of public employee pension savings into them. Corporate pension plans, as much as 40 percent of employee savings. But the individuals counting on retirement checks are neither big enough nor tough enough to take care of themselves.

Few if any pension plan managers have any idea of the specific risks they’re taking -- because hedge funds and private equity funds don’t have to disclose them. And the people whose pensions are at stake -- teachers, policemen, civil servants, and other working Americans -- haven’t a clue.
>>

Also read:
What Hedge funds risk
http://prospect.org/cs/articles?article=what_hedge_funds_risk

>>
But there's a new urgency for reform now because that is no longer the case. Increasingly, pension funds, school endowments, and charities in pursuit of easy money are turning to these investments and potentially putting their funds in jeopardy. Currently, about 20 percent of pensions invest in hedge funds.
>>

[robcon]

29. The millionaires were suckered.

The promises of hedge funds are almost unregulated, so they "pays their money, and they takes their chances.'

[antigop]

30. It's not just the millionaires -- pension funds, endowments, charities.

Please see my previous post.

[robcon]

33. NOT ONE EXAMPLE.

I don't know of any pension plan that is allowed, legally, to invest in hedge funds.

By definition, hedge funds are unregulated funds - not subject to the openness, transparency and reporting that other funds are subject to. As such they are off limits to pension funds.

Reich doesn't provide even one case of a pension fund investing in a hedge fund. I don't think he can.

[antigop]

34. Um, ever hear of CALPERS?

http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2004/nov/calpers--hedge-fund.xml

>>
-- The California Public Employees' Retirement System (CalPERS) today doubled its allocation to its hedge fund program, earmarking $500 million for investment in hedge fund-of-funds.

Today's action increases the pension fund's investments in hedge funds to $2 billion. In 2000, CalPERS established a $1 billion program that made only direct investments in hedge funds.

The action also continues a push by the pension fund to move more of its assets to non-traditional investment strategies that generate greater risk-adjusted returns.
>>

[antigop]

35. GOOGLE(tm) is your friend

http://www.nytimes.com/2005/11/27/business/yourmoney/27hedge.html

Just one example using search arguments:

pension fund "hedge funds"

Here is another:
http://www.rte.ie/business/2007/0718/bearstearns.html

>>
Hedge funds are private capital pools that are typically restricted to rich investors, although large pension funds have invested in the sector in recent years.
>>

[A HERETIC I AM]

36. This New York Times article differs with your take ...from Nov., 2005

While most pension plans have modest stakes in hedge funds, others have invested more than 20 percent of their assets. Weyerhaeuser, the paper company, has 39 percent of its pension fund's assets in hedge funds. In Congress, there has been a push for amendments that would make it easier for hedge funds to manage even more pension money, without having to comply with the federal law that governs company pensions.

And this from further down the page:
One of the first pensions to start working with hedge funds is also the nation's biggest corporate pension fund, the $90 billion General Motors fund. It started with a small test investment in 1999 and increased it to about $2 billion in 2003, said Jerry Dubrowski, a G.M. spokesman.
The company is using hedge funds, along with other unconventional investments, in hopes of getting something close to stock market returns without the market's volatility, Mr. Dubrowski said. To pay out the $6.5 billion G.M. owes to its retirees each year, the pension fund must produce annual returns of a little more than 7 percent. Otherwise, G.M. will have to dip into the fund's principal. At current interest rates, G.M. cannot get those returns with bond investments, and if it tries to juice returns by betting on the stock market, it will have to cope with market swings.

123Next

http://www.nytimes.com/2005/11/27/business/yourmoney/27hedge.html?ex=1290747600&en=f1f8a2ada9436d16&ei=5090

[antigop]

37. There are lots of examples. n/t

[A HERETIC I AM]

38. Yup. But info is often limited. There is a site called "Hedgeworld.com" that wants $5495/yr

for full access to all reports, detailed fund informations, etc.

http://www.hedgeworld.com/membership/

There is a large amount of misunderstanding of these vehicles, i think. Not all of them are wildly speculative and most certainly not all of them are heavily invested in the subprime sector.

I found information today that suggests there are over 10,300 of them out there. About the same as the number of Mutual Funds.

[antigop]

39. But that's the problem -- do people really know what their pension fund is doing? n/t

[A HERETIC I AM]

40. Well, i would submit that the pension fund manager knows....

Whether or not he is sharing what the Hedge manager is doing with the pension funds assets is a different story.

[antigop]

41. I'm not so sure that the pension fund manager really knows what the hedge fund is doing n/t

[A HERETIC I AM]

42. Its job, hopefully!

Think of it this way - If you invest in a mutual fund that is a Large Cap Growth fund for instance, are you aware what the fund manager is doing? What trades he/she makes on a daily, weekly or monthly basis? Probably not. The main thing you care about is whether or not it is performing. Same thing applies for Hedge Funds. Just do what you say you can do and everyone is happy.

Of the better than 10,000 Hedge Funds out there, a grand total of TWO are in the news. This is not a trend.

[antigop]

43. It's not a trend --- yet???? Who knows if they don't disclose anything? n/t

[antigop]

44. Long -Term Capital Management redux?

http://en.wikipedia.org/wiki/Long_term_capital_management

>>
Long-Term Capital Management (LTCM) was a hedge fund founded in 1994 by John Meriwether (the former vice-chairman and head of bond trading at Salomon Brothers). On its board of directors were Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economics<1>. Initially enormously successful with annualized returns of over 40% in its first years, in 1998 it lost $4.6 billion in less than four months and became the most prominent example of the risk potential in the hedge fund industry. The fund folded in early 2000.
>>