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Bear Stearns sued over hedge fund collapse
Thu Aug 9, 2007 3:01 PM ET
By Tim McLaughlin

NEW YORK, Aug 9 (Reuters) - A limited partner in a failed hedge fund run by Bear Stearns says the investment bank took only meager steps to prevent the fund's recent collapse.
New York-based investment firm Navigator Capital Partners L.P. made the accusation this week in a lawsuit filed in New York state Supreme Court in Manhattan. The complaint names Bear Stearns Cos <BSC.N>, its asset management division and the High-Grade Structured Credit Strategies hedge fund.

Bear Stearns was not available for comment.

Navigator Capital, run by Steven Resnick, invested more than $700,000 in the hedge fund between August 2004 and mid-April 2005. The firm and other investors lost nearly the entire value of their investments, losing millions of dollars, the lawsuit said.

"Defendants failed to disclose to investors the significant challenges facing the partnership, and the meager steps they were taking to face those challenges, while at the same time reaping substantial fees," the lawsuit said.
Bear Stearns Asset Management, the hedge fund's general partner, made more than $13.3 million in 2006 from advisory fees and profit sharing before the hedge fund's demise, according to the lawsuit.

Bear said in mid-July that two of its structured finance funds, the Bear Stearns High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, had very little value.
The two funds made bad investments in bonds linked to subprime mortgages, where defaults have surged and faced margin calls from banks and redemption requests from investors. Before their difficulty, the funds combined controlled assets of more than $20 billion.

Last month, the hedge funds filed petitions in U.S. Bankruptcy Court in Manhattan as they attempt to be liquidated in the Grand Court of the Cayman Islands, where they are registered. Early Thursday, U.S. Bankruptcy Judge Burton Lifland issued a preliminary injunction blocking legal action against the hedge funds.

While Bear Stearns cut its own exposure to risky subprime loans in early 2007, the hedge fund run by senior portfolio manager Ralph Cioffi continued to invest in securities backed by the mortgages despite rapidly deteriorating market conditions, Navigator Capital said in its complaint.

The fund started to struggle in February when its assets were marked down 14.4 percent. But due to hedging moves, the loss was only 0.8 percent, the lawsuit said. The fund reported additional losses in the following months.

From Jan. 1 to April 1, limited partners contributed $14.25 million to the fund and withdrew $9.2 million. The fund held $925 million in investor capital and gross long positions of $9.7 billion through the end of March, according to the lawsuit. (Additional reporting by Edith Honan in New York)

Bear Stearns, Countrywide debt protection costs rise
Thu Aug 9, 2007 10:16AM EDT

NEW YORK, Aug 9 (Reuters) - The cost to insure the debt of U.S. brokers including Bear Stearns Cos. (BSC.N: Quote, Profile, Research) and mortgage lender Countrywide Financial Corp. (CFC.N: Quote, Profile, Research) rose on Thursday on renewed concerns that weakness in subprime mortgages were spreading.

Bear Stearns credit default swap spreads were around 30 basis points wider at 140 basis points, or $140,000 per year for five years to insure $10 million in debt. Countrywide's default swaps rose around 40 basis points to 220 basis points, said an analyst.

No Subprime Shelter For Europe
Lionel Laurent, 08.09.07, 1:30 PM ET


America's credit problems are spreading across the Atlantic. BNP Paribas is the latest European bank to run into trouble over exposure to U.S. subprime loans, announcing a freeze on three investment funds on Thursday. Analysts believe that there will be more trouble ahead, after signs that the European securities market is also facing a serious liquidity crisis.

Investor appetite for low-grade, high-risk debt is fading fast after the disastrous fallout from the American subprime mortgage market earlier this year. France's BNP Paribas is hoping that by freezing its Parvest Dynamic, Euribor and Eonia funds -- preventing nervous investors from pulling out their cash -- it can ride out the storm and avoid incurring serious losses.

"I think clearly the value of these particular funds has deteriorated," said Dresdner Kleinwort analyst Millan Gudka. "These assets have been increasingly difficult to price right now partly due to the liquidity constraints. Some of these funds appear to have used asset-backed securities to boost the yield."

According to WestLB analyst Christoph Bossmann, the funds currently are worth approximately 1.6 billion euros ($2.2 billion), with around 30% of their assets linked to the U.S. subprime market.

Shares in BNP Paribas dropped 2.88 euros ($3.94), or 3.4%, to 82.57 euros ($113.05) in Paris. The ripples spread to the rest of the financial sector, which dragged the CAC-40 index down 124.51 points, or 2.2%, to 5,624.78.

Although funds run by French insurer AXA and German bank IKB have also been hit by the subprime crisis, investor fears are spreading even to funds with no exposure at all to U.S. assets. On Monday, German private bank Sal. Oppenheim froze a fund that it managed for Austria's Hypo KAG, again citing liquidity issues. But unlike BNP's funds, here the securities were exclusively European.

"This fund was not invested in U.S. subprime, it didn't have any U.S. exposure," said Markus Bohn, a representative of Sal. Oppenheim. He said it solely invested in European asset-backed securities, with an average rating of A, a middling investment grade.
"I haven't seen any of this before, and I've been here for eight years," said Bohn. "We've never had that problem for a European investment fund."

According to Konrad Becker, analyst with Merck Finck, there was no doubt that European funds would face more crises of investor confidence, regardless of whether the Sal. Oppenheim fund set a new benchmark. "I do not know whether it is the first one," he said, "but I do not think it will be the last."

Wall St troubled by new subprime fears

By Hal Weitzman and Michael Mackenzie in New York
Financial Times
Updated: 3:12 p.m. ET Aug 9, 2007

Wall Street stocks were weaker at noon on Thursday but off their lows following an initial plunge in response to BNP Paribas's announcement that it was suspending three of its funds due to their exposure to the stumbling US credit markets.

By midday, the S&P 500 was down 1.3 per cent at 1478.13 after an opening fall of 1.9 per cent. The Nasdaq Composite index was up 0.6 per cent at 2596.13, paring an initial drop of 1.6 per cent, while the Dow Jones Industrial Average was down 1 per cent at 13,527.22 following an initial slump of 1.8 per cent.

Equity volatility as measured by the Chicago Board Options Exchange's Vix index surged 15.2 per cent to 24.72 and had earlier reached a high of 26.90, its highest level since April 2003.

Among the major benchmarks, the Russell 2000 index of smaller companies was holding up the best, down 0.3 per cent at midday.

The BNP announcement sent stocks lower in Europe amid fears of contagion and the possibility of a global credit crunch.

"The credit crisis is back on," said TJ Marta, fixed-income strategist at RBC Capital Markets.

BNP Paribas reported problems at three of its funds worth a combined $2bn. Several mutual fund managers have stopped redemptions from some of their funds. NIBC, a Dutch bank, reported subprime-related losses of €137m and warned of further losses in the future.

The European Central Bank added liquidity to the money market and in the US, interest rate futures rose sharply and now price in a quarter percentage point easing in the Fed funds rate by September.

That was up from odds of around 25 per cent on Wednesday. The latest credit woes sparked weaker US credit valuations and the yield on the two-year Treasury note had plunged 14 basis points to 4.50 per cent as investors sought a safe haven.

Alan Ruskin, chief international strategist at RBS Greenwich Capital said: "Problems of appropriately marking to market are likely to be systemic, at least in the credit derivatives arena. And therein lies the problem. If Ben Bernanke, [Federal Reserve chairman] was right in alluding to subprime losses at $50bn - $100bn, then only a small percentage appears to have surfaced so far, and since he made those remarks, losses have likely extended across a much broader credit universe than subprime."

Financial stocks led weakness, with the S&P investment bank index down 3.8 per cent.

In earnings news, American International Group reported a 34 per cent rise in second quarter profit. While that exceeded analysts' expectations, the insurer warned that losses in its mortgage guaranty business were spreading from subprime to prime borrowers. In reaction, the stock fell back 1.4 per cent to $65.57 following a gain of 1.4 per cent to $66.48 on Wednesday.
Retail stocks were also in the spotlight as Home Depot announced that a deal to sell its supply unit was being renegotiated and monthly sales figures for July were released.

Shares in Home Depot fell the most in a year after it said it might have to sell its supply unit for less than the previously announced $10.3bn. The US's largest home-improvement chain also announced it was lowering the price range for a stock buy-back to $37-$42 a share, from $39-$44. The company's share price dived 4.6 per cent to $36.06.

In the retail sector, sales were up 2.9 per cent, in line with expectations by Thomson Financial but below the 3.7 per cent rise in the same month last year. Excluding Wal-Mart, the world's biggest retailer, the sector's monthly sales figures were up 3.9 per cent.

Wal-Mart's same-store sales for the month ending August 3 rose by 1.9 per cent, beating estimates of 1.5 per cent. Its shares were down 1.9 per cent at $47.52.

Nordstrom, the high-end retailers, came in well ahead of expectations and the company's shares rose 2.3 per cent to $52.26.JC Penney also exceeded forecasts, posting growth of 10.8 per cent. The company's shares fell 3 per cent to $67.53.

Shares in News Corp were down 0.5 per cent at $22.68 by midday, after the media company reported fourth-quarter profit rose 4.5 per cent late on Wednesday.

Copyright The Financial Times Ltd. All rights reserved.
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