The Securities and Exchange Commission is examining the near-collapse of two Bear Stearns hedge funds that made bad bets on the mortgage market.
The SEC inquiry is "informal" at this point and has not resulted in any subpoenas or formal document requests, a person familiar with the matter said yesterday. This person spoke on the condition of anonymity because the inquiry has not been publicly disclosed.
The existence of the probe was reported by BusinessWeek and CNBC on Monday.
SEC Chairman Christopher Cox disclosed at a House hearing on Tuesday that the agency has started roughly a dozen investigations related to complex aggregations of debt known as collateralized debt obligations, in which hedge funds have increasingly invested.
Mr. Cox declined yesterday to confirm the informal probe of Bear Stearns Cos.
The situation at Bear Stearns took on urgency last week with the near-collapse of two hedge funds that invested in mortgage securities.
Bear Stearns said Tuesday it would provide about $1.6 billion in secured financing to its Bear Stearns High-Grade Structured Credit Fund after the fund sold some assets to partially mollify lenders. Bear Stearns said it is not providing any financing to the second fund.
Banc of America said in a report last week that the troubles could signal the "tipping point of a broader fallout from subprime mortgage deterioration" that could lead to higher rates for new home loans.
Homeowners with about $515 billion in adjustable-rate home loans will see their monthly mortgage bills rise this year as rates reset to higher levels, and another $680 billion worth of mortgages will reset next year, the report said. Of those adjustable-rate loans, more than 70 percent are subprime loans.
The bailout by Bear Stearns is one of the largest such moves since Wall Street's investment banks bailed out Long-Term Capital Management in 1998 to avoid a collapse of the broader financial markets.
It is not alone in facing risk from its own hedge fund portfolio, either. Major financial institutions including Goldman Sachs Group Inc., JPMorgan Chase & Co., and Citigroup Inc. also manage tens of billions of dollars in hedge funds, according to Moody's Investors Service.
On Monday, researchers at Citigroup said subprime mortgage bonds issued last year by Goldman were being downgraded by rating agencies at a faster pace than any other issuer.
Defaults on mortgages to risky borrowers have risen to a new high, and that's done more than just hurt the long-suffering housing market. It has hurt the ability of banks to package mortgage loans as securities that can be traded — which is something many borrowers don't realize their lender even does.
In March, Bear Stearns and UBS AG were ordered by Massachusetts Secretary of State William F. Galvin to turn over documents concerning their stock recommendations as part of an investigation into whether their analysts' research ignored subprime lenders' mounting financial problems.
Shares of Bear Stearns rose $3.96, or 2.8 percent, to $143.31 yesterday.