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This is an unconfirmed, yet interesting email from a reader:

A bond fund closed down yesterday and it brings up another interesting dilemma that few people if anyone wants to address, including the SEC and that is the public mutual funds that have invested in structured mortgage debt.  Many, and I do mean many fund managers are very well aware that their holdings are incredibly overstated in value, yet they do not challenge the pricing companies that evaluate their holdings, unless they view the asset in question to be marked to low.

 A case in point is the Evergreen Ultra Short Fund, which just closed this week.  Yes the fund is paying off it’s shareholders at $7.48 a share, or yesterday's net asset value.  What was yesterday’s net asset value?  Great question.  Just recently one of the fund mangers was offered a bond, which is a matching position to current holdings at a price of 23, that is 23 cents on the dollar.  Great value yet the fund manager was in a pickle and decided against purchasing the bond at such a cheap price.  Why?  As the fund manager said it would create an issue with his mark on the bond that was currently being carried at a dollar price over 95, or 95 cents on the dollar, yet at that point he knew what his bond was worth, yet choose not to challenge the pricing service and it’s assigned value.  The bond ended up trading that was offered to the Ultra Short fund manager to another account at a price of 9.  The buyer was Tattersall, another subsidiary of Evergreen, yet the bond at Ultra Short was not remarked to the downside.


This is happening with a great deal of regularity and is not being reported to the public, yet the public is the one who are at risk.  The fund manager is not rewarded to be truthful and the SEC does not seem to care much about the current environment and protecting the investor.  The losses that will be incurred could very well match or exceed the bank write-offs, after all who bought all those bonds over the last 3 to 4 years that the street has been selling.  Not just hedge funds, that is for sure.


I just thought you might be interested in this story, as I believe it will be a more common occurrence over the next several months.  By the way, it looks like Wachovia will be financing the liquidation of the Ultra Short Fund and I would be willing to bet that the liquidation in the end will cost them a pretty penny.  The values of many of the underlying holdings are severely mis-marked and when they finally end up selling all the paper it may very well cost them over $100 million, in my estimation.  If the Bear Stearns hedge fund managers were charged with crimes then many of these managers are also looking at fraud or gross negligence because they know where paper is trading yet continue to let values on their books be reported as very inaccurate prices.  The list is very long indeed. If this fund is down 18% this month it is not like the values of the underlying securities just dropped that much in June, no that is not the case.  The fund managers were backed into a corner and no longer could hide the losses is my guess.  Just another corner of the world that is lying about value.


Good luck and keep up the nice work.