Bear Stearns hedge funds file bankruptcy following margin call defaults

By Caroline Salls

Pittsburgh, Aug. 2 - Two Bear Stearns hedge funds that invest heavily in the failing U.S. mortgage industry filed for Chapter 15 bankruptcy protection Tuesday in the U.S. Bankruptcy Court for the Southern District of New York to coincide with similar insolvency proceedings filed with the Grand Court of the Cayman Islands.

The bankrupt hedge funds are Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.

According to court documents, following the volatility in the U.S. subprime lending market, by late May the funds had begun to suffer a significant devaluation of their asset portfolio.

Liquidators Simon Lovell Clayton Whicker and Kristen Beighton said in the court filings that the devaluation of these secured assets led to margin calls from many of the funds' trade counterparts, which the funds were ultimately unable to meet.

As a result, the counterparties issued default notices and seized or sold assets that were covered under repurchase agreements or over which they held security interests.

Then, on June 20, Merrill Lynch issued a bid list to some of its clients and sold off some of the funds assets, which prompted further downward pressure on the asset classes and a revaluation of the funds' assets.

On June 22, Bear Stearns Investment Products Inc. agreed to provide a facility to the funds under a master repurchase agreement into which the funds could roll third-party counterparties' outstanding repossession positions, subject to on overall limit of up to $3.2 billion.

The funds rolled $1.6 billion of outstanding repo positions into the facility, but Bear Stearns Investment Products issued a margin call on July 20 that the funds were unable to meet.

Bear Stearns Investment Products subsequently accelerated the repurchase dates for each transaction under the master repurchase agreement and took over the assets that were subject to the repurchase agreement.

The liquidators said other secured counterparties have now sold off fund assets that were the subject of other repurchase agreements, and some are looking to recover shortfalls from the funds.

The liquidators have asked the U.S. bankruptcy court to approve a temporary restraining order that would protect the funds' property and assets and stay any pending or future lawsuits brought against the funds during its bankruptcy.

The funds listed more than $100 million in both assets and debt.

A show cause hearing for the temporary restraining order is scheduled for Aug. 9.

The funds are Cayman Islands investment companies. The Chapter 15 case number is 07-12383.

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