I just read this article. It looks that every time hedge fund looses money today, it some one else fault. Just sickening. The Sure Bet Turns Bad Just a few months ago, bets against securities backed by shaky subprime-mortgage loans were among the most alluring trades on Wall Street. But the market for those securities has since stabilized, potentially hurting those who bet against it, and left a messy squabble in its wake. A band of hedge-fund managers accuse Wall Street's Bear Stearns Cos. of attempting to manipulate the market for securities backed by subprime loans by purchasing shaky mortgages. Bear retorts that it has the right to repurchase mortgages and that sometimes it can help a struggling borrower. Meanwhile, an industry association that oversees derivatives trading has been drawn into the middle of the matter. The confrontation provides a window into complex trading -- and complex ethics -- in the nation's mammoth mortgage market, which played a critical role in financing the housing boom. Hedge funds might not win much sympathy for making indirect bets against the financial health of struggling homeowners. But they say they are trying to protect the integrity of a burgeoning derivatives market that stands at the center of the controversy. The episode also shows the complicated relationships between hedge funds and the investment banks, which trade with them and often fund them. Bear's main antagonist in the squabble, hedge-fund executive John Paulson of Paulson & Co., used to work for the investment bank and says even after a series of highly contentious exchanges, "We have a very good relationship with Bear in all aspects of the business." Bear is one of Wall Street's largest players in the market for credit default swaps, or CDS, instruments that act as insurance policies on various kinds of bonds, including those backed by subprime mortgages. Many hedge funds have bought these swaps, effectively making a bet on an acute downturn in subprime home loans. Bear is widely believed to have taken the opposite position, selling swaps and making a bet that conditions will improve or won't deteriorate as much as some people think. A Bear spokesman says, "We are both long and short the market." Back in February, the shorts looked like they were making a great trade. Many hedge funds had been shorting a derivative index called the ABX that is tied to a basket of subprime bonds with weak credit ratings. The index had a value of 100 when it was launched this past July. By late February it had plunged to a low of 63, bringing millions of dollars in paper profits to the short-sellers. The plunge also caused ripples of worry through the stock and bond investors about the broader health of the U.S. economy. The index has since turned around, reaching 77 in mid-May before sinking back to 73, according to its administrator Markit Group. Back in January, at a Las Vegas industry conference, Bear's head mortgage trader, Scott Eichel, talked with a small group of traders over drinks in the Venetian hotel about propping up the ABX index by buying and rescuing some struggling subprime bonds, say two people who were there. A Bear Stearns spokesman said Mr. Eichel disagrees with the account, but wouldn't elaborate with any details. The recovery of the ABX index has led to howls from hedge funds which are short subprime, including Mr. Paulson, who manages a $12 billion hedge fund. Mr. Paulson says Bear wanted to prop up faltering mortgages-backed securities by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments. Bear denies the allegations. "None of the [mortgage] servicing decisions we make are driven by any activity or outstanding positions in the CDS market," says Tom Marano, who runs Bear's mortgage business. In April, when the ABX was trading at about 74, Paulson executives called Mr. Eichel to ask whether he was contemplating a plan to repurchase mortgage-backed securities. "Maybe we are, maybe we're not," Mr. Eichel replied, according to two Paulson executives, who say he added they should call him if they were interested. A Bear spokesman said the Paulson executives' recollection of the conversation is inaccurate. The prior day, Bear's mortgage desk had sent Paulson a copy of new language it was proposing to the International Swaps and Derivatives Association, the industry group that represents traders of swaps and other complex market instruments. It exacerbated the controversy. The proposed rules would codify its right to prop up a faltering pool of home loans in a mortgage security, even if it knew its clients bet those loans wouldn't perform. "We were shocked," says Paulson vice president Michael Waldorf, that a firm "like Bear would introduce language that would try to give cover to market manipulation." Also on his mind: With a big bearish bet on the ABX, his firm stood to lose a lot if the index didn't fall. Mr. Marano says Bear was simply trying to clarify trading rules to "ensure participants understood the terms of the underlying documents." Paulson fired off letters of complaint to Bear and ISDA. The firm also began rounding up other hedge funds to voice concerns. Nearly 30 players, including the San Francisco hedge fund Passport Capital, the Dallas hedge fund Hayman Capital, and Deutsche Bank AG's Deutsche Bank Securities unit rallied behind it. "All we're after is very simply to maintain the market's integrity," says Kyle Bass, a former Bear employee who is now managing partner of Hayman Capital, which oversees about $3 billion in the subprime market. Credit-default swaps are relatively new to the markets, and despite the guidance provided by ISDA, the rules of play in using swap information to drive mortgage-security decisions remains a gray area in the world of securities regulation. To sift through these issues, ISDA is considering convening a meeting for swap-market players this month. Mr. Paulson says he is "still friendly" with many people at Bear and that he doesn't plan to take his hedge fund's prime-brokerage account, which is housed at Bear, elsewhere. Still, he says, "Whoever proposed this language was trying to give people carte blanche to manipulate the market."