There is this oblique financial story that is so boring I can’t even read it… except that it’s got this great “Wall Street hotshots are morons” angle and, of course like most subprime stories, a “end of the world as we know it” angle.

Bear Stearns (BSC) says it has a plan for rescuing its two hedge funds that are drowning in a sea of risky bonds backed by subprime mortgages. But the Wall Street firm’s June 22 effort to provide up to $3.2 billion in last-ditch financing will do little to help investors in the hedge fund that has suffered the bigger losses.

That’s because Bear Stearns is planning to use all of those billions to shore up its High-Grade Structured Credit Strategies Fund, a four-year-old fund that raised $916 million from investors. That fund is in much better shape than the 10-month-old High-Grade Structured Credit Strategies Enhanced Leverage Fund, which lost 23% of its value at the end of April.

It was the big declines at the enhanced leverage fund that prompted Bear Stearns to suspend investor redemptions, forced it to sell off $4 billion in high-quality mortgage-backed bonds, and caused a crisis of confidence on Wall Street (see BusinessWeek.com, 6/13/07, “Bear Stearns’ Hunt for Big Cash”). The underlying assets in the enhanced leverage fund are believed to be so battered that Bear Stearns isn’t inclined to pour in money, according to mortgage bond traders.

Lou Barnes (subscription) calls the naming of the Bear Stearns fund that was left twisting in the wind, “ultimate hubris.” It was named the “High Grade Structured Credit Strategies Enhanced Leverage Fund.” I guess “high grade” means something different of Wall Street.

The kicker from Lou Barnes is this quote about Wall Street insiders.

Insiders entered the market for mortgage trash in the fall of 2006 when several million civilians knew that you might as well juggle nitroglycerine.

Absolutely! What the heck were they thinking? How could they be so stupid?

Maybe I should get active in the stock market if that is the kind of competition out there.

The conspiracy / “end of the world as we know it” angle is related to this;

By May, Bear had lost the capital, and to meet margin calls sold the high-quality assets, then forbade investors to withdraw, and by last week faced a creditor mob threatening to seize the remaining derivatives and liquidate the two funds altogether.

Then it got worse. After much huffing, the creditors realized that a fire sale was not such a hot idea, because they all have clients invested in the same stuff that Bear has, and gazillions more in loans out to each other secured by that same stuff. If Bear’s trash sold for thirty cents on the buck, then that would be the value of their trash and the collateral securing their other loans.

The market for these subprime based securities called “collateralized debt obligations” or CDO’s (where the collateral is the underlying subprime mortgages) is very thin. They are rarely bought or sold.

Right now the holders of the subprime CDO’s have them valued on their books at $X. If the true value of the CDO’s became apparent, the holders would have to lower their book value and that could have devastating consequences.

Thus, there is a little conspiracy among CDO holders to not establish a current market value of the CDOs. That will give them more time to try and digest the problem.

If the economy remains strong for 2 or 3 years, they may be able to digest the problem. However, if they are forced to revalue the CDOs in their portfolio, it is uncertain what the consequences would be. It could be very bad.