The brokers may have been pledged collateral against their hedge-fund loans but, as Merrill Lynch recently discovered in its dealings with two Bear Stearns hedge funds, it may not be possible to sell that collateral for anything like the current market price.
Two were two mid-level Bear Stearns hedge fund managers who were prosecuted for fraud and acquitted.
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News earlier this week that a third Bear Stearns hedge fund, laden with mortgage debt, might be faltering raised even more concerns about the company.
The money markets' difficulties began in July 2007, when two Bear Stearns hedge funds revealed the damage done to their portfolios by subprime mortgages.
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Two former Bear Stearns hedge fund managers were arrested Thursday morning.
Notwithstanding some recent high-profile setbacks, like the f ailed prosecution of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin, the feds usually win.
In 2009, a federal jury in Brooklyn found Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin not guilty on six counts of conspiracy and fraud.
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Just nine months earlier, Cayne was on the bridge circuit when two Bear Stearns hedge funds collapsed from significant losses on subprime mortgage securities, igniting the crisis on Wall Street.
Bear Stearns' hedge funds held those high-rated tranches, which are supposed to be "safer" than the lower-rated paper.
And the omens from the last real bear market for hedge funds, 40 years ago, are far less encouraging.
This crisis brewed in two Bear Stearns real estate hedge funds, which eventually blew up and contributed to the cause of the crisis.
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Federal prosecutors lost a jury trial against two former Bear Stearns Cos. hedge-fund managers accused of lying to investors about how they invested their assets.
Bad mortgage investments have already killed off two hedge funds at Bear Stearns, so investors in this country heard the news with alarm.
They involved current or former employees of three prominent Wall Street banks--UBS, Morgan Stanley and Bear Stearns--three hedge funds, two broker-dealers and a couple of day traders.
The trouble trickled through to two hedge funds at Bear Stearns that had to be shut down during the summer because of subprime exposure--UBS had also closed its hedge fund division in May--and then the game was on.
The "repricing" has sunk some of the smarter traders, including those running two now-defunct hedge funds at Bear Stearns (nyse: BSC - news - people ), as well as the traders running money at Goldman Sachs ' (nyse: GS - news - people ) Global Alpha fund and others.
For example, one insider told me back in March 2008 that he spoke with a hedge fund honcho who bragged about the profits he made by shorting Bear Stearns shares as it orchestrated a massive withdrawals of hedge fund money from the now defunct Wall Street firm.
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Suspected natural gas reserves have yet to be proved, but they bear the potential to help Europe hedge against uncomfortable reliance on energy from Russian pipelines.
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The fall of Bear Stearns earlier this year persuaded many hedge funds to switch to Goldman Sachs and Morgan Stanley as their prime brokers.
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"Our highest priority is to continue to earn your trust and confidence each and every day, " Bear Stearns wrote in a note to hedge fund clients.
Franklin traded for his own accounts and that of Lyford Cay, a hedge fund he managed at Bear Stearns whose investors were several senior managers of the firm, according to the SEC.
Fears of widespread redemptions and deepening losses spooked the mortgage securities markets Wednesday after Bear Stearns told investors in two troubled hedge funds that there was "very little value" left for them.
So far, government prosecutors have mostly focused on the lower level contributors to the current financial meltdown, such as mortgage brokers who approved fraudulent applications, and some hedge-fund managers at Bear Stearns who allegedly misrepresented the health of their funds.
Looking past the current public cynicism about the hedge fund of funds industry, it is incumbent on financial advisors and their clients to bear in mind that the need for non-correlating asset classes will never change, and hedge funds of funds still provide this effective source of diversification.
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She worked at a hedge fund called New Castle, which was owned by Bear Stearns.
Bear's woes will only exacerbate worries about highly-leveraged hedge funds, an increasing number of which are finding it hard to stay afloat as their prime brokers jack up margin calls.
After all, they stand as high valuation properties that hedge funds short axiomatically if they believe we're in a bear market.
The promotion of a well-regarded dealmaker like Schwartz to chief executive at a firm more known for servicing hedge funds and for fixed-income activities raises the possibility that Bear Stearns will sell additional stakes of itself or find a merger partner.
But the Bear Stearns debacle shows that banks may also have to stump up capital to rescue hedge funds within their own stable.
Ironically, many of its hedge fund clients pulling money out of their accounts could have been short Bear Stearns' stock at the same time, though no one has confirmed a connection.
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