Even though investment bank Bear Stearns (NYSE:BSC) did its best to deal with the deteriorating situation at two of its hedge funds, it looks like the battle has been lost. Earlier in the week, the bank revealed that its High-Grade Structured Credit Strategies Enhanced Leverage Fund is essentially worthless, and its High-Grade Structured Credit Strategies Fund is getting close.
While the impact to the investors in these funds is obvious, the direct effect on Bear Stearns could be less straightforward. A couple of weeks ago, the firm pledged as much as $3.2 billion to the High-Grade Structured Credit Strategies Fund, and though it only ended up giving the fund half that amount, taking a loss like that could certainly put a dent in Bear's future results. The effect it could have on Bear's ability to attract investors to future funds could be equally painful, if not worse.
The financial services sector has been under pressure lately, but Bear has taken a bigger hit than average -- it's now down 18% since the beginning of the year. At this point, it looks like Bear may have a raft of investor lawsuits to look forward to.
Though it's probably an uphill battle for investors on the legal front, an army of lawyers going after Bear is sure to keep the firm's transgressions fresh in the minds of investors. This will weigh most on Bear, but could also have investors in competitors like Goldman Sachs (NYSE:GS), Lehman Brothers (NYSE:LEH), and Merrill Lynch (NYSE:MER) wondering what could be waiting in the wings for those firms.
For more on Bear Stearns, check out:
- Bear Stearns Grumbles
- Before the Call: Kicking the Bear out of Bear Stearns
- The Orderly Deleveraging at Bear Stearns
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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy once had the pleasure of enjoying a White Russian with The Dude.
