by Calculated Risk on 6/25/2007 04:53:00 PM

From BusinessWeek: Bear's Big Loss Arouses SEC Interest

Bear Stearns (BSC) may have a lot of explaining to do about a big restatement of losses at one of its troubled hedge funds—and not just to its investors. BusinessWeek has learned that the Securities & Exchange Commission recently opened a preliminary inquiry into the near-collapse of Bear Stearns' High-Grade Structured Credit Strategies Enhanced Leveraged Fund. People familiar with the inquiry say regulators are interested in learning how the Wall Street investment firm came to dramatically restate the April losses for the 10-month-old fund ...
...
Privately, Bear Stearns is spreading the word that the April restatement was prompted by actions by some of their lender banks. People familiar with the matter say the Wall Street firm claims the banks began demanding that the hedge fund put up more collateral for the loans it had taken.

The banks, on their own accord, began marking down the value of the subprime bonds that the hedge fund had invested in, which had the effect of precipitating the current crisis, according to the people familiar with Bear Stearns' account of the events.

Your daily dose of BS. (uh, Bear Stearns).

UPDATE: BofA Analyst on impact on housing of Bear Stearns Hedge Fund debacle, via Mathew Padilla: Will Bear Stearns' woes lead to higher mortgage rates, lower home prices?

• While these discrepancies may not be revealed in the short term, we believe the object lesson in liquidity would at the very least give CDO investors a reason to require better yields and more likely would result in more restrictive margining requirements by those firms accepting CDOs as collateral. A cascading deleveraging from CDO^2s through CDOs to the non-investment grade tranches of private label securitizations would ultimately produce higher rates to new mortgage borrowers.

• Short-term, private label securitizers (of subprime and Alt-A) should experience weaker gain on sale margins and/or reduced securitization leverage (increased non-investment grade retention). Longer term, it should result in higher coupon rates, reducing mortgage borrowing demand, which the disproportionate impact on subprime and Alt-A would further pressure housing prices by taking out of the market the marginal buyers. Weaker house prices and higher rates would not only increase the pace of foreclosures but more importantly increase loss severities on the foreclosures. The higher losses would in turn create more pressure for higher rates (relative to reference rates) potentially triggering another round of tightening. ...