Bear Stearns High-Grade Structured Credit Funds

It was the best of times, it was the worst of times. It was the age of wisdom, it was the age of foolishness.

The saga of the Bear Stearns High-Grade Structured Credit Funds invites many uninspired literary references, but as history repeats itself, many of them offer valuable insight. In the case of fund manager Ralph Cioffi's illiquidity driven downfall, the facile LTCM analogy is nonetheless apt. Even if it is a bit farfetched to compare the Russian government defaulting on their GKO bonds to the US poor having to give up their homes in the current subprime melt-down, the flight-to-quality is overbearingly similar as well as the bailout situation. Furthermore, the ensuing revaluation of assets will most probably lead to excellent distressed opportunities (one telling example of this is the deals hedge fund group SAC Capital Advisors was able to close during the aftermath of the earlier collapse).

 

Major differences include the likely containment of risk and the increased resiliency of the financial markets, all indicating genuine progress. Below we will try to recapitulate what really happened including a background on the developments in the US subprime residential markets. We will wrap up with some predictions regarding the fallout's effect on structured credit investing going forward. We would also like to point out that we were not investors in the funds: everything in the text below builds on publicly available information and we make no claims regarding the accuracy of the data.