Bear Stearns Funds: Is Everything OK Now?

Well, that was quick. After throwing the entire financial media (if not the actual markets) into a week-long tizzy, Bear Stearns seems to have found a way to stabilize things without committing too much of its own money and without subjecting its funds' prime brokers to any losses. Can this really be true?

It's really hard to find a good overview of where we're at with regard to the two Bear Stearns funds. But on Monday, we started to hear that Bear's $3.2 billion bailout of its High-Grade Structured Credit Strategies Fund had been scaled back to just $1.6 billion, and that the amount of money owed by the High-Grade Structured Credit Enhanced Leveraged Fund had somehow managed to be reduced from $7 billion to $1 billion. Now we're getting official numbers out of Bear, and it seems that the younger, riskier fund owes $1.2 billion in total.

You could be forgiven for missing the good news amidst all the quotes and commentary: the news on the impressive success of the newer fund in reducing its borrowings, especially, has been buried deep in the coverage – in stark contrast to the news of its $7 billion in debts when the troubles first started.

And it's certainly far from clear how Bear managed to reduce the fund's borrowings so substantially, without putting in any extra capital itself. Was there some kind of rocket science going on? Does the fund now have much more embedded leverage than it did before? No one seems to be asking those questions.

But the chances that Bear's lenders are going to suffer large losses now seem to be greatly diminished – unless, of course, they've quietly accepted some large losses already, and just not told anybody. Does anybody have any clarity on all of this?