The Bear Stearns Companies (NYSE: BSC) is striking fear into the heart of Wall Street. That's because it borrowed so much money to invest in Collateralized Debt Obligations (CDOs) -- packages of loans sliced by risk and interest rate paid -- backed by subprime mortgages. Bear's Bear will discuss why the average investor should care about the fallout from these bad bets.

The New York Times [registration required] reports that Bear Stearns put up $3.2 billion to bail out investors in one of its hedge funds -- the second biggest bailout since the $3.6 billion bailout of Long Term Capital Management in 1998. That after a largely behind the scenes scramble to keep a nasty secret on Wall Street from harming the reputations of all the investment banks who stand behind the market for mortgage backed securities.

The report suggests that the securities in which Bear Stearns invested represent a huge market. In 2006, $316.4 billion in mortgage-related CDOs were issued, about 77% more than in 2005. But the reason that this involves so many Wall Street players -- Merrill Lynch & Co. (NYSE: MER), Goldman Sachs Group, Inc. (NYSE: GS), and JPMorgan Chase & Co. (NYSE: JPM) -- is the phenomenal level of borrowing. The Wall Street Journal [subscription required] suggests that Bear Stearns borrowed a huge amount -- with only 5 cents worth of equity for every dollar of CDOs it controlled in one of its funds. In particular in February 2007, its High-Grade Structured Credit Strategies Fund had $667 million of equity and controlled $15 billion worth of assets.

Continue reading Bear's Bear: Banks bite Bear for bad bets

Bear's Bear: Banks bite Bear for bad bets originally appeared on BloggingStocks on Sat, 23 Jun 2007 09:30:00 EST. Please see our terms for use of feeds.