The biggest hedge-fund bailout since LTCM

Two of broker Bear Stearn's funds narrowly avoided collapse last week as their dabblings with CDOs went awry. But as the era of cheap credit draws to a close, this is merely the first falling domino of many.

An old adage says that the more inflated a fund's name, "the less likely are the practitioners to know what they are doing", notes Anthony Hilton in the Evening Standard. Enter broker Bear Stearns's High-Grade Structured Credit Strategies Enhanced Leverage Fund. Along with another Bear Stearns hedge fund (the High-Grade Structured Credit Strategies Fund) it virtually collapsed last week. Their bets on complex securities backed by ailing subprime mortgages homeloans to borrowers with dodgy credit histories, a sector that has seen defaults jump sharply of late went wrong.

Last week, after the investment banks that had lent to the funds refused to come to their aid, seizing collateral instead, Bear Stearns lent the second fund $3.2bn, the biggest hedge-fund bail-out since the rescue of Long Term Capital Management in 1998. The fate of the less healthy and more leveraged Enhanced fund, which had equity capital of $600m but borrowed about ten times that sum, is still uncertain. The drama fuelled fears that losses could extend to other players in the mortgage markets and beyond, crimping lending and thus undermining the tide of easy money that has inflated financial markets all over the world over the past few years.

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