The subprime loans fall out is getting worse. The ripple effect on the mortgage loans drives two Bear Stearns hedge funds almost to a screeching halt. Understand that hedge funds usually bet heavily into some kind of investments. Investing into hedge funds not for the fainted heart. Only for those who understand the risks. It is like playing casino on steroids. The two funds bet heavily into mortgage-related securities and derivatives. Merrill Lynch seized $800M of their bond collateral and put it on private auction. If they sell it on the market, this kind of news would definitely rush investors to dump securities.
The biggest losers? Bondholders.
As defaults rise, bondholders stand to lose as much as $75 billion of subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts.
- Two Hedge Funds' Assets Put Up for Sale [USA Today]
- Rescue Plan for Two Hedge Funds May Falter [Boston Globe]
- Bearn Stearns Plans $3.2 Billion Hedge Fund Bailout [Bloomberg]
- Bearn Stearns CEO Says Overcollateralized on Loan [Reuters]