Tuesday, June 19, 2007

Bear Stearns Update: Merrill plans to sell off $850 million

by Calculated Risk on 6/19/2007 06:18:00 PM

From the WSJ: Merrill Lynch To Dump Bear Stearns Fund's Assets

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.
Brian sent me this link with the comment: "Look out below!"

Added: Bill Fleckenstein wrote the following today before the Merrill announcement (Fleck's site):
"I have to wonder why Wall Street is working overtime to rescue a $600 million fund. On the other hand, I think we all know the answer: In a liquidation scenario, lots of people fear what would happen to leveraged portfolios across Wall Street and the world if sales of some of the fund's paper were marked to
market.
...
I can't recall a fund of this size ever being bailed out. Liquidation is the usual outcome when a fund is down 25% to 30%, as this one supposedly is. Of course, it might be down a lot more if real prices were used.
...
Apparently, all sorts of games are being played and attempts being made to avoid marking mortgage slices-and-dices to market -- in addition to the fact that many funds aren't required to mark their positions to market until the ratings agencies say so."

Posted with permission.
First, it appears the fear will now become reality - assets will be sold. However Fleck appears to suggest that hedge funds aren't required to mark-to-market until the "rating agencies say so". We have seen a wave of downgrades recently, but overall the rating agencies have been slow to react to the subprime implosion. So if the hedge funds have to wait for the rating agencies, this will take some time to play out.