By Alan Zibel
Thursday, June 28, 2007
The Securities and Exchange Commission is examining the near-collapse of two Bear Stearns hedge funds that made bad bets on the mortgage market.
The SEC inquiry is informal and has not resulted in any subpoenas or formal document requests, a person familiar with the matter said yesterday. This person spoke on condition of anonymity because the inquiry has not been publicly disclosed.
The inquiry was disclosed Monday by BusinessWeek and CNBC.
SEC Chairman Christopher Cox said at a House hearing Tuesday that the agency has started a dozen investigations related to complex aggregations of debt known as collateralized debt obligations, in which hedge funds have increasingly invested.
Cox would neither confirm nor deny the probe of Bear Stearns.
The situation at Bear Stearns took on urgency last week with the near-collapse of two hedge funds that invested in mortgage securities.
Bear Stearns said Tuesday that it would provide about $1.6 billion in secured financing to its Bear Stearns High-Grade Structured Credit Fund after the fund sold some assets to partially mollify lenders. Bear Stearns said it is not providing any financing to the second fund.
The bailout by Bear Stearns is one of the largest such actions since Wall Street's investment banks bailed out Long-Term Capital Management in 1998 to avoid a collapse of the broader financial markets.
It is not alone in facing risk from its own hedge fund portfolio. Such major institutions as Goldman Sachs Group, J.P. Morgan Chase and Citigroup also manage tens of billions of dollars in hedge funds, Moody's Investors Service said.
On Monday, researchers at Citigroup said subprime mortgage bonds issued last year by Goldman were being downgraded by rating agencies at a faster pace than any other issuer.
In March, Bear Stearns and UBS were ordered by Massachusetts Secretary of State William F. Galvin to turn over documents concerning their stock recommendations as part of an investigation into whether their analysts' research ignored the mounting financial problems of subprime lenders.