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The Bear Stearns Bears--The Near Collapse of Two Real Estate Hedge Funds Sends Economic Shock Waves Around the World
Last week's big economic news was that two
Bear Stearns hedge funds worth $20 billion are teetering near collapse.
These two Collateralized Debt Obligation (CDO) funds--ironically named the
"Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage
Fund"
and
the "High Grade Structured Credit Strategies Fund"--are in trouble
because of their heavy exposure to sub-prime
mortgages. A well-publicized rescue plan involving Merrill
Lynch fell apart. At one point Merrill
Lynch--one of Bear’s credit backers--said
that they planned to seize about $850 million worth of collateral assets from
Bear Stearns and sell them on the open market. Reuters
reported
Bear
Stearns
injected
$1.5
billion of cash into the troubled CDO funds. Meanwhile we read that
the
head of the European Central Bank, Federal Reserve Chairman Ben Bernanke, and
about 250 other international banking executives planned to meet at a "Financial
Stability Forum" on June
23 & 24 at BIS headquarters in Bale, Switzerland. Much of their conversation
will surely center on the derivatives traders, especially the Bear Stearns hedge
funds.
The
results of the BIS meeting?
Uncertain.
The
bottom
line: Be ready. Minimize your exposure to market fluctuations.
Diversify into precious metals. Minimize you exposure to U.S. dollars. Any
U.S. dollar-denominated
investment
should
be
specially selected to be resistant to inflation. For example, see the next blog
entry
about
Treasury
Inflation-Protected
Securities
(TIPS.)
I've
been warning
SurvivalBlog readers about derivatives trading
in general, and hedge
funds
in particular, for more than a year. Ditto for the US residential real
estate, especially on the coasts. The hedge fund crisis will likely widen.
Collateralized Debt Obligations will plummet as their underlying assets lose
value. The macroeconomic consequences of this nascent collapse are enormous.
The ride may get very bumpy. Fasten your seat belts, folks.
