Bear Stearns Fund, Battered by Subprime Woes, Seeks to Dissolve

Date: Thursday, November 15, 2007
Author: Jef Feeley, Bloomberg.com

A Bear Stearns investment fund hurt by the decline in the subprime mortgage market and facing creditors' complaints about its management asked a Delaware judge to allow it to dissolve and liquidate its assets.

Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund LP was linked to a Cayman Islands-based fund shutting down because of the collapse in value of investments tied to subprime mortgages, the investment firm's lawyers said Nov. 13 in a filing in Delaware Chancery Court in Wilmington. New York-based Bear Stearns is the fifth-largest U.S. securities firm by market value.

``The partnership can no longer operate in the manner contemplated'' by the agreement that created it, Bear Stearns lawyers said in their request to dissolve the so-called ``feeder fund'' and have accountants from KPMG International oversee its liquidation.

More than three months ago, Bear Stearns placed several hedge funds decimated by subprime mortgage losses in bankruptcy in the Cayman Islands. The company cited volatility in the subprime- lending market and subsequent margin calls for the July filings.

The world's largest financial institutions have written down more than $21 billion of mortgages, securities and corporate loans whose value fell during the third quarter. A surge in defaults of poor-quality home loans has prompted more than 110 mortgage companies to close, seek bankruptcy protection or put themselves up for sale since the start of 2006.

$1.6 Billion Bailout

Bear Stearns' master funds sought court protection after the firm granted one of the investment funds $1.6 billion in emergency financing, the biggest hedge-fund bailout since the collapse of Long-Term Capital Management LP in 1998.

Bear Stearns officials said yesterday they have asked to have KPMG tapped to oversee the liquidation of the feeder fund because it is handling the dissolution of about five of the firm's other funds.

``KPMG is already serving as the liquidator of the two master funds,'' Russell Sherman, a Bear Stearns spokesman, said in an e-mailed statement. ``By having KPMG, which is operating independently of BSAM, serve as liquidators for the feeder funds, it will increase efficiencies and provide for a coordinated effort.''

The feeder fund, whose performance was tied to the master funds located in the Cayman Islands, also operated through a ``Total Return Swap'' set up with Barclay's Bank Plc, according to the court filing.

Bankruptcy Protection

After the master fund sought bankruptcy protection in the Caymans, Barclay's ``terminated'' the swap arrangement, the court filing added. Peter Truell, a Barclay's spokesman in New York, declined to comment on Bear Stearns' request to dissolve the fund.

He said in an e-mailed statement that the bank has previously noted ``any loss in relation'' to subprime mortgages ``is not expected to be material.''

Bear Stearns said in securities filings that the company's losses from funds included a $200 million write-off of its investment in the fund and anticipated fees. Other investors may have lost more than $600 million as a result of the funds' meltdown.

Investors are slated to vote in New York on Nov. 16 on whether Bear Stearns should be removed as general partner from the feeder fund the company wants a Delaware judge to dissolve.

The Daily Telegraph newspaper in London reported late yesterday that investors in the U.K. have voted to oust Bear Stearns Asset Management as the managing partner of another feeder fund to the master fund in bankruptcy in the Caymans.

FTI Capital Advisors was elected to replace Bear Stearns and control the fund in order to investigate its investments in mortgage-backed securities, the newspaper said.

Shares Rise

Bear Stearns rose $2.58, or 2.6 percent, to $103.45 in New York Stock Exchange composite trading after reaching $111.01 earlier today. The shares have fallen 36.6 percent this year.

Company officials said yesterday that writedowns in the fourth quarter will be $1.2 billion, less than some analysts had expected. Bear Stearns has reduced its subprime holdings by more than 50 percent in the past two months.

The Delaware case is In re Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund LP, 3349, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net .