Last week, Bear Stearns & Co. announced that it has hired a law firm to investigate losses incurred by two of its hedge funds.  The hedge funds were forced into bankruptcy after losing significant amounts of money from investments in the subprime mortgage market.  The stock market is currently reeling over credit problems stemming from the collapse of the sub-prime mortgage industry.  Bear Stearns unsuccessfully tried to rescue one of the funds with $1.6 billion in loans.  Despite those efforts, both funds collapsed.  The failure of the two funds apparently then led to the resignation of co-president and co-chief operating officer, Warren Spector.

At the same time, Goldman Sachs Group announced that one of its hedge funds, which had also suffered losses from its subprime mortgage investments, was receiving a $3 billion bailout from several investors.  The Global Equity Opportunities Fund managed by Goldman Sachs lost more than half its value in July.  Several investors in the fund have decided to invest an additional $3 billion to shore up the fund’s financial health.  Goldman Sachs itself decided to invest $2 billion, with the rest of the money coming from other investors, including Maurice “Hank” Greenberg and Eli Broad.

Both announcements are significant, as they signal attempts by private equity firms and hedge fund managers to address the potential fallout from the collapse of the subprime mortgage market.  As previously reported on this blog (see here), a recent survey conducted by Marsh, a branch of the world’s largest insurance broker,  Marsh & McLennan Cos., suggests that the private equity sector is bracing itself for a substantial increase in potential lawsuits.  As more hedge fund firms face losses from the subprime credit problems affecting the market, we can expect more pressure on both private equity firms and hedge fund managers as the result of the lost appetite of the latter for the debt issued by the former.