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Hedge Fund Manager on Bear Sterns Collapse

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This is a very interesting article from the magazine n+1 regarding the Bear Sterns collapse from the perspective of a hedge fund manager. The actual fund is unnamed, but the article gets into all sorts of risk relationships and sheds some interesting light on sub-prime mortgage securities, credit markets and other topics largely ignored by the business and mainstream press. The following are some excerpts from the article (emphasis my own).

On sub-prime:

When you’re talking about risk management, there’s an assumption that not every asset class will be correlated. So, sure, sub-prime blows up but the bank’s OK because prime will hold up, or there won’t be a perfect correlation with leveraged loans. But what’s going on is that all these credit products are performing badly at once.

And, on Bear Sterns:

Bear was a bank that was very involved in the asset-backed and sub-prime market. Both as a principal and as an agent.

What happened this summer was funds managed by Bear Stearns—not things on their own books, other people’s funds that they manage, other people’s capital—those funds were heavily leveraged and invested in asset-backed securities. Those funds blew up—they went into uncontrolled combustion. They failed very quickly. One day they were there, the next all the assets were marked down, then they were insolvent and folded up. Now that’s not Bear Stearns’ capital, but there were guys sitting in the Bear Stearns office.


I don’t know the size of the team, but they were sitting there, buying asset-backed securities backed by sub-prime mortgages, they were borrowing a lot of money, they used the capital they had, they borrowed outside money, they bought sub-prime mortgages. They were highly, highly leveraged. 50:1 leverage.


Bear Stearns supposedly had an expertise in sub-prime and asset-backed securities; it is an expertise of theirs. They’re still alive. […] You know when somebody falls off a motorcycle, and they want to harvest their organs, they’re still alive until they harvest the organs. Right now Bear Stearns, there’s an EKG, it is pinging, they’re technically still alive and JPMorgan is waiting for the healthcare proxy to sign and say they can start harvesting the organs. This is where Bear is right now. They had an expertise.

Sadly, even experts make mistakes. The people that looked at these securities every day were too used to success, but when the market turned, they were sunk. Hindsight is great, but it appears that policies and strategies set during periods of bloated growth don’t work during downturns–especially as volatile as the current market. Whoever was brave enough to call the bust–and there weren’t many in the mainstream–had to make an awful lot of money.


Written by walonline

April 14, 2008 at 11:45 pm

Posted in Markets

Tagged with , ,

One Response

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  1. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

    Tim Ramsey

    April 14, 2008 at 11:59 pm

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