The Bad News Bear Stearns

I found a bit of humor in Bear Stearns' (NYSE: BSC  ) press release on Monday, which said that the company is now the official sponsor of college squash. After all, this comes as the firm is becoming the poster child for hedge funds getting squashed by the choppy credit market.

The pain hasn't abated yet for Bear. The firm announced on Wednesday that its alphabet-soup hedge funds -- The Bear Stearns High-Grade Structured Credit Strategies Master Fund and The Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund -- have officially filed for bankruptcy. Problems arose when both funds swung for the fences in the home mortgage market -- and missing badly. Both funds were also very highly leveraged, compounding the severity of their losses to the point of no return.

To be sure, Bear isn't the only one firm there with some sour positions in the credit market. Another hedge fund, Sowood Capital Management, has recently made headlines after losing half of its $3 billion in capital due over the past month.

The blowups have Mr. Market gnawing on his nails, for obvious reasons. Publicly traded companies that manage hedge funds, such as Goldman Sachs (NYSE: GS  ) , Fortress (NYSE: FIG  ) , Lehman Brothers (NYSE: LEH  ) , and JPMorgan (NYSE: JPM  ) , could be sitting on ticking time bombs of their own. And as the credit markets continue to reevaluate risk and reprice the debt that's out there, there's the potential for a painful ripple effect.

But how far will the ripple go, and how turbulent will it be? As always, it's tough to predict the future, but it's probably safe to say that while there are some broad ramifications on the way, they won't be as bad as what's going on with the hedge funds. Like Bear, many hedge funds take concentrated positions and use leverage to enhance their returns. This means they make a killing if they're right, but lose money even quicker if they're wrong. Non-hedge funds with exposure to risky debt are less likely to have their positions as concentrated or as leveraged and so will take milder hits.

Hopefully, the squash sponsorship will work out for Bear; right now, it has shareholder lawsuits to look forward to from the two bankrupt hedge funds. To boot, recent reports have revealed that a third fund, the Asset-Backed Securities Fund, is also starting to struggle. For the rest of the market, it may just take time to figure out just how far down this rabbit hole goes.

More stern coverage of Bear:

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy suggests keeping all hands and arms inside the boat at all times.


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