I thought I had mentioned the Bear Stearns fiasco on the blog but in looking back i don't see it in the last month. Okay, it seems Bear Stearns has tripled their loss estimates for their, are you ready?,
High Grade Structured Credit Strategies Enhanced Leverage Fund. Well actually anyone who swallowed the name of that one, invested and then was surprised at what happens is probably way too naive anyway. This is a great read about how difficult it is to price or value derivative type investments, in this case our old friend, you guessed it, the sub prime mortgage. Why did the loss estimate get tripled from the recent 6% loss number just last April to gulp 18-23%. First understand what Bear Stearns is doing.
Bear 'invests' in sub prime mortgages. This is a loan to groups of new home buyers who really should not be buying the homes in the first place as they are of questionable credit worthiness. Of course, Bear does not put up all the money to buy the mortgage, hence the word leveraged in the title of the fund. Well once the folks that lent them the money to do this realize that the mortgages are plunging in value, they want Bear to put up more money. This is known as a margin call, lenders want more margin to protect themselves. Do you think Bear put the margin up? Of course not. Now we have the famous if I may use the phrase, Mexican standoff. Will the lenders sell the bonds at discounted rates or will Bear dare them to do that realizing that doing so in itself brings a reality check on just what is there for collateral. OH did I mention that Bear suspended the ability to redeem shares in the fund? Why would they do that? well they themselves would have to sell the bonds which were bought with borrowed money to pay back the shareholders. But the bonds are not worth their original cost and then the lenders would want more money if the investors got paid, so, nix to the investors, hold and hope it gets better.
Beware of funds with titles like these. Beware of firms that think it is prudent to sell funds like these. Be glad you are studying accounting so you can unravel the intricacies of such stuff for folks that depend on the value of a CPA. BSC is down from 170 to 140, it ought to be lower than that in my opinion.
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