The headquarters of Bear Stearns Cos. in New York

June 14 (Bloomberg) — Bear Stearns Cos. the second-biggest U.S. underwriter of mortgage bonds, is liquidating holdings from one of its hedge funds after making money-losing bets on subprime mortgage bonds, said three people with knowledge of the decision.

Bear Stearns sought bids today from prospective buyers for about $3.8 billion of mortgage securities from the fund, said the people, who declined to be identified because the plan isnt public. The 10-month-old Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund, which is down about 20 percent this year, had about $600 million of investors money and borrowed to increase its buying power, one of the people said.

As delinquencies rise on loans made to homebuyers with poor credit or heavy debt loads, bondholders stand to lose as much as $75 billion on securities backed by the mortgages, according to an estimate in April from Pacific Investment Management Co. manager of the worlds largest bond fund. Bear Stearnss fund is among the first to start liquidating because of the subprime crisis, which already has forced lenders such as New Century Financial Corp. and ResMae Mortgage Corp. into bankruptcy.

«If you look at the broad picture of housing, the fundamentals have continued to worsen, said Brian Horey. general partner at Aurelian Partners LP. His New York-based firm has moved from betting against shares of subprime lenders such as New Century to betting against companies focused on better credits, including IndyMac Bancorp in Pasadena, California.

Shares Slump

New York-based Bear Stearns, the fifth-largest U.S. securities firm by market value, reported today that second-quarter earnings, excluding a one-time charge, fell 10 percent to $486 million, or $3.40 a share, missing analysts estimates.

Chief Financial Officer Samuel Molinaro said in an interview that the funds performance had an «immaterial effect on the companys earnings. He added that second-quarter revenue at the asset-management unit increased.

«Our level of direct investment in the fund is relatively small, non-material to the future, and we dont have any other creditor relationships with the fund, he said.

Shares of Bear Stearns rose 11 cent today to $149.60 in New York Stock Exchange composite trading. The stock has declined 8.1 percent this year, the worst performance on the 12-member Amex Securities Broker/Dealer Index.

UBS AG, Switzerlands biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit last month, partly because of losses in the mortgage-bond market.

`Where Theres Smoke

Investors «may also call into question the values of similar assets held by other hedge funds, depending on how much Bear Stearns got in the auction and possible later asset sales by the fund, said Josh Rosner. managing director at New York based investment-research firm Graham Fisher & Co.

Bear Stearns, led by Chief Executive Officer James Cayne. is the No. 2 underwriter of mortgage bonds after New York-based Lehman Brothers Holdings Inc. data compiled by Thomson Financial show. Combined delinquency and default rates on subprime home loans in bonds are at the highest since 1997, according to Arlington, Virginia-based Friedman, Billings, Ramsey Group Inc.

A derivative index used to bet on defaults of pieces of mortgage-bond deals with the lowest investment-grade ratings and sold in the second half of 2006 reached a new low today. Its dropped about 39 percent since it was developed in January.

«Where theres smoke theres fire, said Ray Remy. head of fixed income in New York at Daiwa Securities America Inc. A group of hedge funds, led by New York-based Paulson & Co. has expressed concerns to the U.S. Securities and Exchange Commission that investment banks may try to inappropriately prevent defaults on subprime-mortgage bonds to cut losses on related derivatives.

Investor Redemptions

The Bear Stearns fund halted redemptions after investors sought to withdraw $300 million by June 30, the newsletter Hedge Fund Alert said last week. The news service Informa Global Markets reported yesterday Bear Stearnss plan to auction the $3.8 billion of mortgage bonds. Most of the bonds carry AAA and AA credit ratings, it said. Hedge funds are private, largely unregulated pools of capital whose managers participate substantially in any gains on the money invested.

Some of the funds holdings of the highest risk, potentially highest return pieces of so-called collateralized debt obligations — pools of bonds, derivatives or loans that are cut into pieces sold to investors — were transferred in September to Everquest Financial Ltd. in return for a stake and cash.

Everquest, whose co-CEO Ralph R. Cioffi manages the fund selling the bonds as a senior managing director at Bear Stearns, filed in May to raise as much as $100 million in an initial public offering. Cioffi didnt return a call seeking comment.

The value of the bonds being auctioned by Bear Stearns range from $1 million to almost $110 million and bids were due at 10 a.m. New York time today, the Wall Street Journal reported. Bear Stearns and the companys executives have invested about $40 million of money in the fund, the newspaper said. The fund recently had a total of about $6 billion in investments, it said.

To contact the editor responsible for this story: Emma Moody at emoody@bloomberg.net