Don't borrow money from Merrill Lynch (NYSE: MER). It may want you to pay it back. Two Bear Stearns (NYSE: BSC) funds learned that lesson recently. BS's High Grade Structured Credit Strategies Enhanced Leverage Fund and High Grade Structured Credit Strategies Fund invested a great deal of their capital in bonds which were secured by sub-prime mortgages. Since that market has not done well as delinquencies and foreclosures have gone up, the funds have been hit by investors who want their money back.
According to The Wall Street Journal [subscription]: "As of March 31, the Enhanced Leverage fund had $638 million in investor capital and at least $6 billion in borrowings." But much of the money was invested based on a recovery in sub-prime mortgages, and that move did not pay off. Merrill wants to seize and liquidate $850 million of the assets in the two funds to get back the money that it had loaned them.
Bear Stearns is in a race against time. Other lenders to the funds, Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC), have been attempting a work-out to pay off the loans due them so the investors in the funds will not lose most or even all of their money.
But with Merrill's plan to get its money back, it appears that the funds will be shut down.
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