Bear Stearns Buys Time for Struggling Fund

NEW YORK, June 22 -- Bear Stearns confirmed Friday it will bail out one of its troubled hedge funds with $3.2 billion in secured loans, but the Wall Street firm sought to convince the broader market that its troubles were "relatively contained."

The firm said it stepped in to save the Bear Stearns High-Grade Structured Credit Fund because market uncertainty made it difficult to unwind the fund's assets -- mostly securities backed by risky mortgage loans.

That unit and its sister fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, have come under pressure as the value of the assets underlying the bonds they hold fell sharply in recent months. Combined, the two funds had assets of more than $10 billion as of a week ago, the company said. Bear's commitment was less than $35 million, according to Chief Financial Officer Samuel L. Molinaro Jr.

Bear prevented the Structured Credit Fund's dissolution "because there continues to be significant value in it," Molinaro said in a conference call Friday. He said the $3.2 billion loan was backed by assets that "have been beaten down dramatically" in the past two weeks, but that the collateral is worth more than the amount of the loan, making it relatively low-risk.

Molinaro said the company's mortgage business, recognized as the most experienced on Wall Street, would not be affected by the funds' performance. Separately, ratings agency Standard & Poor's said Friday that the problems with the funds have no effect on the company's overall credit rating.

By injecting money into the hedge fund, Bear is buying time to make trades to generate income so it can repay investors who want to get out.

While the loans will go to the Structured Credit Fund, Bear Stearns said it was working on a solution for the Enhanced Leveraged Fund's problems.

Bear Stearns worked over the past week to sell the funds' assets to generate money to repay investors, which primarily include other Wall Street firms such as Merrill Lynch and J.P. Morgan Chase. Bear had no material exposure to the fund, Molinaro said.

Merrill Lynch seized collateral reported to be worth $850 million and auctioned the assets earlier this week. Other firms flirted with demanding collateral but backed off after talking with Bear Stearns.

It still seems likely that the Enhanced Leveraged Fund will be unwound. The only question is how dramatically that will occur. "There will continue to be asset dispositions, but we hope to do it without forcing massive liquidations in the market," Molinaro said. He said the unwinding could take several months.

The concern for the broader market is that other investors will get jittery about holding these types of securities. If banks were to demand collateral for their loans and sell those assets on the market at fire-sale prices, the sell-off would lower the value of the entire class of securities.

He said Bear Stearns does not have any other funds exposed in the same way to the market for mortgaged-backed securities. But he added that the two funds' high-profile struggles seem to be increasing the cost of borrowing money for risky investments.

Bear Stearns shares fell $2.06, or 1.4 percent, Friday to close at $143.75.