The Bear Stearns bail out of one of its failing hedge funds was the biggest rescue since 1998, when Long Term Capital collapsed.
That failure triggered a flight to quality in financial markets as Russia defaulted on bonds, adding to the pressure from the then Asian debt crisis.
We all survived that threatening event, but this time around there's much more at stake.
Bear Stearns has been battling for the best part of a month to save its hedge fund but last week its hand was forced as Merrill Lynch and other creditors threatened to seize assets to repay loans made to the funds.
Bear Stearns said in a statement that the High-Grade Structured Credit Strategies Fund would be provided a credit line which would help replace loans extended by banks including Citigroup and Lehman Brothers.
Bear Stearns offered to back the fund, one of two that made bad calls on what are called collateralized-debt obligations, or CDOs. That was after creditors including Merrill Lynch started taking the funds' CDOs as collateral and selling them in auctions to raise money to repay the loans.
By announcing the bailout and reaching an agreement with creditors, Bear Stearns will prevent a fire sale of the collateral, which would trigger a wasting plunge in prices and a never ending spiral to collapse.
This way Bear Stearns has given itself and the funds time to conduct an orderly sell down to stabilise the situation and hopefully stop a contagion like spread of fear to similar highly-leveraged funds.
Media reports say the Bear Stearns fund has lost about 10 per cent of its value this year, while the related fund, the 10-month old High-Grade Structured Credit Strategies Enhanced Leverage Fund, dropped some 20 per cent.
The Enhanced Leverage Fund was more leveraged, meaning it had larger borrowing relative to its assets. Bear Stearns has talks underway on stablising this fund's affairs.
The problem is that since the sharp rise in rates at the start of this month, the funds have received a rising level of margin calls that ran faster than liquidations could be made of underlying investments. At the same time, the sharp rise in rates has seen a fall in the value of the underlying assets, meaning a yawning black hole was looming in the not to distant future.
The media reports say creditors had lent $US9 billion to the funds which then invested more than $11US billion inhighly leveraged investments.
The lenders were among some of the biggest names in US financial markets and are reported as including: Merrill, Lehman, JPMorgan Chase & Co., Goldman Sachs, Citigroup, and Cantor Fitzgerald, Bank of America Corp, Barclays Bank Deutsche Bank.
According to the various media report the two funds were involved in highly speculative investing. They invested in highly rated CDOs — securities backed by bonds, loans, derivatives and other CDOs — that were cut in value by the rising tide of defaults on subprime mortgages.
The fund also lost on other forms of speculation in the home loan bonds markets.
It is the biggest bailout since the $US3.5 billion invested to support Long Term Capital Management.
But assuming the best case for losses in the case of both funds at $US 2 billion, (a very rough estimate), then the losses so far from the subprime mortgage crisis is in the tens of billions of dollars, with 50 lenders closed or cutting back operations and giants from the likes of GE Capital to GMAC Finance wearing losses of $US2 billion between them.
There's an old adage in finance to be considered: that the first estimate is always the best estimate in financial crashes.
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All this turmoil happened as the IPO of Blackstone Group happened on Friday.
Blackstone shares rose 13 per cent on Friday, the first day of trading, ending up $US4.06 to $US35.06, after reaching a high of $US38.
The firm sold 133.3 million units for $US31 each yesterday and the closing price gave Blackstone a market value of $US38 billion.
Blackstone's sale of a 12.3 percent stake raised $4.13 billion, the largest US IPO in five years.
But is this a bit of a mirage, especially with market conditions unsettled?
As solid as it was, the Blackstone gain on day one was shaded by the debut of the first buyout group to float, Fortress Investment Group back in February.
Its shares jumped 68 per cent in early February after it raised $US634 million. They have fallen 22 per cent since.
Blackstone, being almost seven times larger, would be a disaster if it suffered the same sort of loss in market value four months on from now.
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But the deals that sent the strongest signal about changing investor attitudes to buyouts and other highly leveraged deals, were the ones that attracted the least attention.
Details are scarce but US market and media reports say Thomson Learning, the textbook and educational testing unit of Thomson Corp of Canada, was forced to slash its $US2.14 billion offering to $US1.6 billion because investors refused to stump up the money for the riskiest type of bonds.
The reports say Thomson Learning dropped the bonds and agreed to pay higher interest rates on its surviving offering.
And, US Foodservice, part of Dutch supermarket giant, Royal Ahold NV, was also forced to lift interest rates on its unquantified offering to attract investors.
Wall Street analysts say this represents a major turn in sentiment by investors in speculative areas: a combination of the problems in the subprime market and the sharp spike in rates in early June seems to be behind the switch in sentiment where investors now demand higher interest rates for issues carrying higher perceived risk.
There's an estimated $US300 billion in similar offerings due to come to market including multi-billion dollar refunding deals for LBO's of credit-c
