Bear Stearns takes a big subprime hit

Amy Scott Jun 20, 2007


Scott Jagow: Some chickens came home to roost on Wall Street today… Merrill Lynch has seized $800 million from two troubled hedge funds. These hedge funds, managed by Bear Stearns, got too wrapped up in the subprime mortgage market. More now from Amy Scott.

Amy Scott: The two funds at Bear Stearns invested heavily in securities backed by subprime mortgages. As more borrowers have defaulted on those loans, the value of those investments has declined.

Janet Tavakoli heads Chicago consulting firm Tavakoli Structured Finance. She says compounding Bear Stearns’ problems is the fact that the funds borrowed a ton of money to finance their investments.

Janet Tavakoli: If you’ve only put 10 percent down, but the value of your assets decline, you’ll get a call that says the 10 percent down that you had is now only five percent. We need you to come up with more money. And that’s the situation Bear Stearns found itself in.

News reports say one lender, Merrill Lynch, has seized at least $800 million in assets and plans to auction them today. Tavakoli says pension and mutual funds invested in the same kinds of securities could run into similar trouble.

I’m Amy Scott for Marketplace.

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