Interfluidity still has unfinished business with Felix Salmon, but that will have to wait. Usually we take great pleasure in disagreeing with Felix, but today he makes one point that is unassailable: Bear Stearns Needs English Lessons. The firm sent out a letter to its unlucky investors that managed to communicate almost nothing. Shorter Bear Stearns (my paraphrase): "You have lost all, or nearly all, of your money. But do entrust your wealth with us in the future. Ordinarily we don't stiff our clients quite so badly. Besides, we hired some new guy, so everything is better now."

If I were an investor, I might wish to console myself with some of the lurid details. In particular, I'd want to know what happened to the assets I used to own. To whom were they sold, under what circumstances, at what price? Were assets liquidated in arms-length transactions, or are fund managers still holding assets but reporting losses based on estimated valuations? How were the claims of creditors settled? Did the funds repay their debts in cash? Did creditors confiscate and liquidate assets, or in some kind of workout, did creditors accept collateral in lieu of repayment?

If creditors did accept repayment-in-kind, under present circumstances that might not be an arms-length transaction. (After all, the asset managers and creditors likely have continuing relationships unrelated to the two funds, and a shared interest in avoiding perceptions of conflict or disorder in the market.) As an investor in one of the funds, I'd want to know how much debt was extinguished for each of the assets surrendered, that is, what sort of valuations were implicit in the workout, and how they were arrived at. If the assets were not in fact auctioned, perhaps creditors paid less in terms of debt forgiven than the assets were in fact worth. Perhaps Bear's interest in putting an embarrassing incident behind it without causing turmoil in a fragile market led it to drive less-than-a-hard bargain with creditors, who were after all in an exploitably poor bargaining position. Were fund managers gentlemanly among Wall Street colleagues, or fierce on behalf of their investors? I'd want to know.

If there was any repayment-in-kind, I'd also want to know about that if I had a position in one of the banks that were lenders to the funds. Perhaps Bear did drive a hard bargain, and my bank was forced to extinguish too much debt for the privilege of owning iffy securities. Perhaps my bank decided that accepting questionable collateral as full repayment was better than forcing the bankruptcy of the funds, because no matter what, the collateral was all it could hope to get, and calling it "repayment-in-full" avoided the embarrassment and potential loss of confidence associated with having been defaulted upon. In this case, risks and potentially outright losses have been transferred from the troubled fund to my bank, which may force a write-down of bank assets in the future. I would want to know.

Does anybody know these details? Thus far, all the reportage I've seen conveys very little more than Bear conveyed in its letter to investors. Which is to say, practically nothing at all.

Steve Randy Waldman — Thursday July 19, 2007 at 12:24am permalink
Cassandra (mail) (www):
When Amaranth liquidated, I heard trusted anecdotes of their traders asking friendly banks for bids on illiquid hard-to-value paper that the bank itself had issued abd Amaranth had purchased only a month or two before at "par", only to get gentlemanly bids in the region of 70 or so. "'s the best we can do...take it or leave it...". This of course was followed by some expletives about the trader and his mother, followed by further insults and a slam of the phone, which after a period of respite was in turn succeeded by a return phone call by the Amaranth trader to said Bank with a resigned acceptance of what proved to be the only viable bid. That trade in itself made the desk very nearly it's annual risk trading profits, and no doubt paid the private school fees and then some for the lads on the desk.

And THAT was in the more gentlemanly City of London. What one might expect to transpire on Wall Street surely can only improve the anecdote and its inference.
7.19.2007 11:29am
I agree that investors should expect a more complete discussion of what happened (perhaps they got more verbally?). I think much of what you've said applies to the fund that 'only' lost 90% of its value. Regarding the other fund...

I'm not sure there is any mystery. It appears the fund was highly levered and made bad bets. Seems like the losses were large enough that no matter how things were settled, there was no equity left. I continue to wonder how much the margin lenders got out - I'm guessing some have good sized losses.

We probably know more about Merrill's loans than almost anything else about the fund. According to reports, Merrill had provided margin loans of $800 mln backed by certain securities. When the fund started to implode, they met with Bear Stearns, didn't like what they heard, and exercised their right to seize the collateral. They tried to auction the securities off, but were only able to sell $100 mln. It is unclear why they didn't sell the remainder - prices too low? no bids? believed the market would turn? It is also unclear what happened thereafter. There were rumors that they had more discussions with Bear and other creditors, but it is not clear what, if any, workout happened. Other margin lenders followed a similar routine, but got out earlier and appear to have been more successful in getting their money back.

All of this was in articles in the press and I'm writing this from memory, so thats at least two strikes against me. Hopefully it isn't entirely off base...
7.19.2007 9:13pm
Steve Randy Waldman (mail) (www):
I just find it astonishing that hedge-funds can maintain a "veil of secrecy" concerning the specific details of assets, valuations, and transactions after losing nearly all of investors' capital. "Just trust us, your money is gone."

The main mystery re the heavily levered fund is whether lenders got out whole, liquidated and took losses, or are holding collateral assets in lieu of repayment. With the less leveraged fund, any "gentlemanly" underbids obviously cost investors.

It's one thing that active funds wish to keep heir portfolios secret, even from investors. One can understand why managers would want to keep details of defunct funds secret as well, as new funds might use similar strategies. But you'd think that for funds that really crash and burn, investors would insist upon the right to peek.
7.20.2007 9:27am
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