Hedge funds fleeing Bear\'s prime broker business

Date: Monday, March 17, 2008
Author: Dane Hamilton, Reuters.com

NEW YORK (Reuters) - Even the backing of the New York Federal Reserve and JPMorgan Chase can't keep hedge funds from fleeing Bear Stearns' once-vaunted brokerage division.

Some hedge funds that have regularly traded with Bear over the years say they are shifting to other prime brokers, fearing they won't be able to get their cash and securities out of the bank if it were to be forced to file for bankruptcy.

"To the extent that we had balances at Bear, we moved them away in the last 10 days," said a senior executive at a $1 billion New York-based hedge fund, who like others asked to remain anonymous. "If they fail, we will have trouble getting out our cash and securities, and we are not alone in doing that."

Hedge funds use prime brokerage divisions to execute trades, borrow money and other services with larger funds using multiple brokers. Bear has long been among the top prime brokers, along with Goldman Sachs and Morgan Stanley. Lately, UBS, Citigroup, Deutsche Bank and others have been making big inroads into the lucrative market for serving growing legions of hedge funds.

But since rumors of liquidity problems at Bear Stearns, began circulating in recent weeks, large hedge funds say they have been moving their business elsewhere. Several cited the example of Refco, the futures broker that abruptly went bankrupt in 2005, leaving thousands of clients scrambling for cash and securities held in margin accounts.

"There is no one in their right mind who is primed with Bear would keep their money there," said a portfolio manager at a $6 billion New York hedge fund. "The risk (of a Bear failure) is pretty low, but if something goes wrong all of a sudden you can't get your money out."

Bear is facing major problems in other parts of this business during its credit crisis.

Financial market traders across London have been told by their firms to stop dealing with Bear Stearns. At least six major institutions in London -- including Commerzbank, Royal Bank of Scotland and JPMorgan -- had stopped giving prices to the U.S. bank, a credit trader at one European institution in London, who declined to be identified, told Reuters. 

Credit Suisse had also stopped trading with Bear Stearns, a London-based equities broker said.

None of the institutions named by the traders would comment on the subject when contacted by Reuters.

A London-based government bond trader said banks had been withdrawing from transactions with Bear Stearns since Thursday.

Bear, which on Friday said it lined up emergency financing from the New York Federal Reserve and JPMorgan Chase, has been servicing hedge funds for several decades, since the early days of the industry that has grown to some 10,000 funds with $1.9 trillion in assets.

The chief executive of Bear, Alan Schwartz, on a conference call on Friday, said: "I think this is a bridge to a permanent solution." He said the lending facility is sufficient for Bear to fund its daily activities, conduct "business as usual."

One wealthy investor, who holds stakes in a half-dozen hedge funds, said he is confident his managers are avoiding using Bear for prime brokerage services for now, even though he is betting Bear will survive its current crisis.

"Any risk manager worth their salt should be thinking long and hard about switching," said the investor. "If Bear is holding the securities and Bear goes under, you may have legal wrangling to get those securities back. You become a general creditor of Bear."

Representatives of Bear Stearns could not immediately be reached for comment.

(Additional reporting by Natalie Harrison, Christina Fincher, Mike Dolan and Anna Stablum in London, Peter Starck in Frankfurt, and Richard Leong and Chris Reese in New York; Editing by Leslie Adler)