Bear Stearns Cos. told investors in its two failed hedge funds that they’ll get little if any money back after “unprecedented declines” in the value of the securities used to bet on subprime mortgages.
“This is a watershed,” said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.”
Estimates show there is “effectively no value left” in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and “very little value left” in the High-Grade Structured Credit Strategies Fund, Bear Stearns said in a two-page letter. The second fund still has “sufficient assets” to cover the $1.4 billion it owes Bear Stearns, which as a creditor gets paid back first, according to the letter, obtained yesterday by Bloomberg News from a person involved in the matter.
Bear Stearns, the fifth-largest U.S. securities firm, provided the second fund with $1.6 billion of emergency financing last month in the biggest hedge fund bailout since the collapse of Long-Term Capital Management LP in 1998. The losses its clients now face underscore the severity of the shakeout in the market for collateralized debt obligations, or CDOs, investment vehicles that repackage bonds, loans, derivatives and other CDOs into new securities.
FINRA arbitration is a dispute resolution process offered by the Financial Industry Regulatory Authority (FINRA) for resolving conflicts between investors, brokerage firms, and registered representatives. It serves as an alternative to traditional court litigation, providing a faster and often less costly way to settle disputes. In FINRA arbitration, a neutral arbitrator or panel hears both sides of the issue and makes a binding decision. This process is particularly common in cases involving allegations of securities fraud, breach of fiduciary duty, or other violations of securities laws. Investors and firms generally agree to arbitration in their customer agreements, making it a common method for resolving issues in the securities industry. With a focus on efficiency and finality, FINRA arbitration helps maintain trust and stability in the financial markets.