Merrill sells assets seized from Bear Stearns

Auctions assets from Bear Stearns funds that bet heavily on subprime mortgages; other firms decide to sell assets back to Bear Stearns.


NEW YORK (CNNMoney.com) -- Merrill Lynch has seized about $800 million of assets from troubled hedge funds managed by Bear Stearns, throwing in doubt the chances that the funds will survive.

But some other major Wall Street firms, including JP Morgan Chase (Charts, Fortune 500) and Citigroup (Charts, Fortune 500), dropped plans for their own auction of assets from Bear Stearns (Charts, Fortune 500) funds, and instead agreed to sell assets back to Bear Stearns to end their exposure.

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Efforts by Bear Stearns to rescue two hedge funds hit by bad bets on subprime loans appear to be faltering.

By late Wednesday, Merrill Lynch (Charts, Fortune 500) had sold enough of the assets, which were used as collateral for loans made to the two funds, to cover its exposure to the ailing funds, Reuters reported.

The assets were were mainly bonds backed by other securities. More asset sales are expected Thursday.

Merrill Lynch declined to comment. Bear Stearns was not immediately available for comment.

The two funds suffered double-digit losses through April after making bad bets on securities backed by subprime loans, according to Reuters. The subprime market, which gives home loans to borrowers with weak credit, has been roiled by rising defaults.

Bear Stearns has also been negotiating with JPMorgan Chase, Merrill Lynch, Citigroup and other creditors in an attempt to restructure the hedge funds. Other big lenders include Goldman Sachs (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), The Wall Street Journal reported earlier Wednesday.

Merrill initially seized the assets Friday and planned to sell them Monday, but it refrained from doing so until it saw the restructuring plan from Bear Stearns, sources told Reuters.

After seeing the plan, which included $1.5 billion of additional capital from Bear, Merrill decided to go ahead with the sale of the assets, the news agency reported.

Meanwhile, JPMorgan Chase and others had also put some of the Bear Stearns assets up for sale. But Reuters reported late Wednesday that JPMorgan Chase canceled its auction and instead sold the assets back to Bear Stearns.

Similarly, Bank of America and Goldman Sachs agreed not to sell assets on the open market.

The agreements with JPMorgan, BofA and Goldman mean that the banks will end their exposure to the hedge funds without selling assets on the open market and potentially depressing the broader market, Reuters stated.

In an interview with CNNMoney, Dan Castro, managing director at GSC Group in New York, said that if the two Bear Stearns funds collapse, it would likely be an isolated event. Still, he said, others that invested in subprime mortgage-backed securities may also run into trouble.

"Some guys made bad bets so we may see some more sellers out there," he told CNNMoney.com. "There isn't going to be a flood of hedge funds liquidating, but other guys are having problems."

Just a few months back, an industry insider had warned of a "catharsis" and coming collapse in the bond market.

"We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process."

What is striking about the troubled Bear Stearns fund is the vast experience of the team assembled in 2003 to create a hedge fund with $25 billion in assets.

Cioffi spearheaded the initial structured credit efforts at Bear Stearns, according to Fitch Ratings analyst Vincent Matsui. Cioffi has been with Bear Stearns Asset Management since 1985, when he first started in fixed-income sales with a specialty in structured finance.

Ray McGarrigal, a senior managing director who has been with Bear Stearns since 1997, is another lead manager, along with Matthew Tannin, a senior managing director who has been with Bear Stearns since 1994 on the Collateralized Debt Obligation structuring desk.

CDOs are pools of bond securities that are grouped together to help diversify risk. Cioffi warned investors attending the February CDO and Credit Derivatives conference about inexperienced managers who may not understand the risks of the market.

"Up until now, any CDO manager, primarily new CDO managers with light staffing, very little technology and unbalanced capability, was able to get a CDO done," Cioffi said at the time. "I don't see that going forward."

--from staff and wire reports Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.