Bear Funds Being Liquidated: Who Wants to Buy?

Fire Sale! Everything Must Go!

It's the kind of news which draws shoppers in any market – or any normal market, anyway. It seems that today not only Merrill Lynch but also JP Morgan, Deutsche Bank and others are seizing and selling the assets of a couple of troubled Bear Stearns hedge funds.

Generally, on Wall Street, anybody who buys securities in such a situation ends up looking pretty smart. The sellers don't really care what kind of price they're getting: they'll just sell as much as they have to in order to be repaid on their loans, and are happy leaving the hedge funds holding the losses. So there's a definite opportunity for aggressive investors to try to pick up a bargain here.

On the other hand, there is a risk of dominoes falling. If the fire-sale prices are particularly low, that could force a lot of other hedge funds to revalue their holdings sharply downward – which in turn could spark a whole new round of fire-sales, much bigger than a couple of small funds at Bear.

Anybody buying here is taking a risk. Credit spreads remain very tight, which means that there's a lot of room for Bear's assets to fall further, even from today's low, low prices. It will take a brave and aggressive investor to enter this market today. On the other hand, there are lots of brave and aggressive investors out there, and the last time the subprime mortgage index was this low, it rebounded quite impressively.

So the game is on. Who wants to play?