June 20, 2007 (LPAC) -- Two big, highly leveraged hedge funds at Bear Stearns are close to shutting down, after lenders rejected a last-ditch rescue plan, and are bailing out.

Merrill Lynch has seized $800 million of bonds held as collateral for loans to the funds, and is seeking bids as of today. Goldman Sachs and Bank of America are unwinding transactions, but so far agreeing not to dump the bonds on the market. Lehman Brothers and Credit Suisse auctioned off smaller amounts of the Bear Stearns' portfolio on June 19.

Hit by huge holdings in bonds backed by subprime mortgages that have declined in value, Bear's High Grade Structured Credit Strategies Fund and High Grade Structured Credit Strategies Enhanced Leverage Fund, suffered double-digit losses through April. (see article here)

A fire sale of the collateralized debt obligations could cause significant losses and margin calls at other hedge funds, as it drives down their value markedly. "The real fear has to do with just how many other funds and warehouses [credit lines] could be in trouble," a portfolio manager at Brown Brothers Harriman was quoted as saying by Bloomberg.