Biz Dev in NYC by Rob Tsai

Alan Abelson of Barron’s [registration required] recaps in his weekly Up & Down Column Wall Street the large losses of Bear Stearns’ two hedge funds:

We don’t know if the Guiness Book of World Records keeps score on this sort of thing, but you’d think that losing close to $20 billion in a figurative wink is quite an achievement and surely deserves some special recognition

Yalman Onaran of Bloomberg covered the story on July 17:

Bear Stearns Cos. told investors in one of its hedge funds that they won’t get any money back after creditors forced it to sell assets at depressed prices, according to a letter sent by the firm.

While a second fund still contains “sufficient assets'’ to cover the $1.4 billion it owes the New York-based firm, there’s “very little value left for the investors,'’ Bear Stearns said in the two-page letter, a copy of which was obtained by Bloomberg News from a person involved in the matter. Bear Stearns bailed out that fund last month with $1.6 billion in emergency funding.

The fund that now has nothing left for investors, the High- Grade Structured Credit Strategies Enhanced Leverage Fund, had $638 million of capital as of March 31, according to performance reports sent to clients at the time. The second fund, called the High-Grade Structured Credit Strategies Fund, had $925 million.

Both funds made leveraged bets in an effort to boost returns. The enhanced fund borrowed about $11 billion, or almost 20 times its capital. Its sister fund, the one Bear Stearns bailed out last month, borrowed almost $9 billion.

That second fund has lost about 91 percent of its value this year, according to a person with direct knowledge of its performance who declined to be identified because the figures aren’t public.

It looks like Abelson got his $20 billion number by adding these publicly bandied $11 billion and $9 billion numbers.

However, with regards to the 91% loss in one fund and the total wipe-out of the other fund, is Bear Stearns referring to only the equity investors?  Or were the lenders equally wiped out?  

If the Bear Stearns letter regarding performance is reference to only the equity investors, then this $20 billion number bandied about is misleading.  I’m assuming the creditors will step in and try to liquidate the positions, though I doubt the lenders will be whole either.

This CBS Marketwatch article highlights how Barclays (acting in the dual role of equity investor and lender) lost its equity stake but recouped its loan:

Barclays lent the fund about $200 million and later offered an additional $250 million, the Journal reported. The $200 million loan has been paid off, while the $250 million was never extended, the Journal said.

However, Barclays is now considering its options for recovering $400 million that it invested in the fund separately from the loan, the Journal reported, citing people familiar with the matter. The possibilities are a negotiated settlement or litigation.

As most people with a margin account know, your brokerage typically issues a margin call if the equity in your account falls below a minimal threshold of leverage.  Though I suspect the institutional leverage game differs substantially from the retail leverage game (not the least of which is the amount of leverage hedgies get - 10x versus 2x for the small fry).