‘Enhanced’ leverage ruined this fund and its investors
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Early in 2006, Dad invested $500,000 in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leveraged Fund, which declared bankruptcy this year because it was filled with risky mortgage securities. Dad has been making investment decisions for 50 years. Unfortunately, he had enormous faith in his Bear Stearns broker, who urged him to invest in this hedge fund. He was told that this fund was “very nearly as safe as a CD” and would provide an annual return between 12 and 14 percent.
Did the broker lie to my dad about the risks? Will Bear Stearns make a good faith effort to reimburse him and others who lost money in this hedge fund? If not, can you recommend a law firm that has the firepower to recover Dad’s losses? And should I write the New York Stock Exchange to ask for help?
R.S., Vail, Colo.
Dear R.S.:
Surely you’re joking. The New York Stock Exchange doesn’t give a fig about your dad’s loss. Its primary concern is protecting The Bear Stearns Cos. Inc., a member of their club enjoying golf games, cocktail chat and poker night with their managing directors. Be mindful that John Thain, the inutile chief executive officer of the Big Board, is a Goldman graduate and that these scurrilous birds flock together.
I trust the Bear Stearns bosses as much as an American soldier should trust an Iraqi wearing a large overcoat! But I doubt your dad’s broker sinned. Rather the Bear Stearns bosses cleverly programmed him – sort of like a Stepford husband – to accept without question everything he was told. Heck, I know of two Bear Stearns brokers who invested in that hedge fund for their personal accounts.
I think your BS broker may have earned an 8 percent to 10 percent commission on that sale including bonuses. Not bad for an office visit!
The blame rests squarely on the shoulders of the managing directors of Bear Stearns, who designed, portfolioed and marketed the hedge fund. The fund was designed to use leverage as high as 20-to-1. In other words, this fund at times borrowed $20 for each $1 your dad and other victims invested. And even in the high-rolling, freewheeling hedge fund milieu, leverage of 20-to-1 is considered abusively excessive.
So the managing directors filled the hedge fund’s portfolio with $700 million of risky, mortgage-backed securities using only $35 million of real, invested money. They claimed that $700 million of mortgage backs were conservative investments. At this rate, a 5 percent drop in market value would wipe out every penny of invested equity. And those subprime-mortgage-backed securities are as risky as skydiving without a parachute.
Bear Stearns ain’t going to make even a modicum of effort to reimburse investors for those losses. The bosses have convinced themselves that they have done nothing wrong. This wrongheaded thinking reminds me of the fraudulent real estate limited partnership scandals in the early 1990s, when Prudential, Merrill and others had to be compelled by the courts to reimburse investors. That’s where you and others must go to seek redress.
Any recovery will be a long, drawn-out process. I’ve sent you the names of three law firms that should pay you for the privilege of handling your dad’s case.
Bear Stearns plans an extraordinarily vigorous defense of its actions, which it has been advised to do in order to save face. However, lawyers will soon swarm around investors such as your dad like locusts, and you’ll have your pick of the litter.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service
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