Enter multiple symbols separated by commas

Hedge Funds Slam Bear Stearns Over Subprime Losses: WSJ

Hedge fund managers are accusing Bear Stearns of trying to manipulate the market in securities based on subprime mortgages, the Wall Street Journal reported in its online edition.

The confrontation provides a rare look into the complex trading in the mammoth U.S. mortgage market, which played a critical role in financing the housing boom, and the complicated relationships between hedge funds and investment banks, the paper said.

Hedge funds that had sold short such securities made profits when an index tied to a basket of subprime bonds was falling. But the index has recovered in recent weeks, leading to howls of protest from hedge funds, according to the report.

Bear Stearns
Bear Stearns

The chief critic, John Paulson of Paulson & Co., a $12 billion fund, says Bear Stearns wanted to prop up faltering mortgages-backed securities by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments, the Journal reported.

Bear Stearns is one of Wall Street's largest players in the market for credit default swaps. By selling swaps, Bear bet the subprime home loan market would improve or at least turn out to be healthier than expected.

Neither Bear Stearns not Paulson & Co. immediately returned calls seeking comment. The head of Bear's mortgage business denied the allegations, according to the report.

A downturn in the U.S. housing market this year has led to rising defaults in the subprime mortgage market, which caters to borrowers with weak credit histories. More than two dozen subprime lenders have collapsed, while others have tightened their lending standards.

Contact U.S. News


    Get the best of CNBC in your inbox

    Please choose a subscription

    Please enter a valid email address
    To learn more about how we use your information,
    please read our Privacy Policy.

Don't Miss

U.S. Video

  • Hero miles for military members: Real estate magnate's plea

    Chairman of the Fisher House Foundation, Ken Fisher, discusses the Hero Miles program with CNBC's Dina Gusovsky. During Military Appreciation Month, Fisher is asking every traveler to donate 1,000 of their miles to replenish the Hero Miles programs that is in danger of running out.

  • Cramer shuts down this market's haters

    "Mad Money" host Jim Cramer on why this market can't stop, won't stop.

  • From the battlefield to the boardroom

    Your Grateful Nation is dedicated to helping Special Forces veterans enter the corporate world and Knot Standard provides complimentary suits to vets. Mad Money's Jim Cramer spoke with Rob Clapper, Your Grateful executive director; John Ballay, Knot Standard co-founder and president; Tej Gill, retired U.S. Navy Seal; and Darren McB, active duty U.S. Navy Seal.