The Bear Stearns High-Grade Structured Credit Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund collapsed in June 2007 due to heavy exposure to subprime mortgage-backed securities and collateralized debt obligations (CDOs).
Managing a combined US$20 billion at their peak, the funds used high leverage to purchase AAA-rated subprime securities in the expectation of stable returns. The strategy involved borrowing to amplify investments and using credit default swaps for hedging. However, the subprime mortgage crisis that started in early 2007 caused massive defaults, which saw CDO values plummet. By February 2007, the High-Grade Fund reported a 14.4% asset markdown (mitigated to 0.8% by hedges), but losses escalated.
In June 2007, Bear Stearns bailed out the High-Grade Fund with US$1.6 billion to meet margin calls, while the Enhanced Fund, with US$642 million raised in 2006, was nearly worthless by July. Both funds filed for Chapter 15 bankruptcy on July 31, 2007, with investor losses totaling approximately US$1.8 billion. Lawsuits followed, alleging that managers Ralph Cioffi and Matthew Tannin misled investors about risks. They were acquitted of criminal charges but settled U.S. Securities and Exchange Commission fines (US$1.05 million total).
The collapse, driven by leverage, illiquid assets, and market misjudgment, contributed to Bear Stearns’ broader financial distress, culminating in its 2008 sale to JPMorgan Chase.
This case wasn’t included in the book as the hedge funds that collapsed were internal to Bear Stearns and most investors were bailed out.
Sources:
Bajaj, Vikas, & Creswell, Julie (2007), “Bear Stearns Staves off Collapse of 2 Hedge Funds,” The New York Times, June 21: https://www.nytimes.com/2007/06/21/business/21bonds.html
McLaughlin, Tim (2007), “Bear Stearns Halts Redemptions in Third Hedge Fund,” Reuters.com, August 9: https://www.reuters.com/article/business/bear-stearns-halts-redemptions…
Morgenson, Gretchen, & Thomas, Landon (2007), “$3.2 Billion Move by Bear Stearns to Rescue Fund,” The New York Times, June 23: https://www.nytimes.com/2007/06/23/business/23bond.html
No author listed (2007), “2 Bear Stearns Funds Are Almost Worthless”, The New York Times, July 17: https://www.nytimes.com/2007/07/17/business/17cnd-bond.html