A slice of Bill Fleckenstein’s commentary from today on this situation:
(go to http://www.fleckensteincapital.com – subscription required – for the full story)
“Among the handful of news items worth covering, I think the most important one is Wall Street’s drive to bail out that mouthful of a Bear Stearns vehicle, the High-Grade Structured Credit Strategies Enhanced Leverage Fund. According to one report, Citigroup plans to infuse it with $500 million, with another $1.5 billion coming from Bear Stearns itself. (Yet another story today said that Blackstone was interested in bailing the fund out.)
“I have to wonder why Wall Street is working overtime to rescue a $600 million fund. On the other hand, I think we all know the answer: In a liquidation scenario, lots of people fear what would happen to leveraged portfolios across Wall Street and the world if sales of some of the fund’s paper were marked to market. And, if that were to occur, maybe even the mighty Blackstone might not get to go public.
“I can’t recall a fund of this size ever being bailed out. Liquidation is the usual outcome when a fund is down 25% to 30%, as this one supposedly is. Of course, it might be down a lot more if real prices were used. Considering that (a) the fund was allegedly worth $6 billion, (b) its managers have already sold $3.8 billion of AAA and AA paper, and (c) they’re now putting in $2 billion on top of the original $600 million in capital, it sure smells a lot worse than they have alleged. Apparently, all sorts of games are being played and attempts being made to avoid marking mortgage slices-and-dices to market — in addition to the fact that many funds aren’t required to mark their positions to market until the ratings agencies say so. You don’t have to be too smart to see that this is a ticking time bomb. One of these days, it’s going to detonate and there will be hell to pay. The only question is when.”
