June 19 (Bloomberg) -- Bear Stearns Cos., the biggest broker for U.S. hedge funds, offered to provide $1.5 billion in loans to help rescue a money-losing fund run by its asset-management unit, a person familiar with the situation said.

The plan calls for New York-based Bear Stearns to provide the money only if some of the hedge fund's creditors, which include Merrill Lynch & Co. and JPMorgan Chase & Co., inject $500 million of cash into the fund, said the person, who declined to be named because the negotiations aren't public.

Bear Stearns, seeking to stave off liquidation of the fund, made the commitment yesterday in a meeting with creditors after losses forced the sale of $4 billion of mortgage bonds last week. Merrill Lynch and JPMorgan had planned to sell another $800 million of bonds of so-called collateralized debt obligations owned by the fund this week, the person said. The fund's potential closure sparked concern about wider losses in the market for subprime-mortgage bonds and CDOs.

``It's tough to tell whether this was an isolated event or whether there will be other funds like this that have bought this type of paper and are facing mark downs or redemptions,'' said Peter Nolan, a product portfolio manager who runs the CDO business at Chapel Hill, North Carolina-based Smith Breeden Associates Inc. The firm manages about $34 billion in fixed- income assets, about a third of which are asset-backed bonds.

Bear Stearns spokesman Russell Sherman didn't immediately return calls seeking comment. Jessica Oppenheim, a spokeswoman for New York-based Merrill Lynch, declined to comment, as did Brian Marchiony, a spokesman for New York-based JPMorgan.

`Ripple Effect'

The banks may be considering a bailout because asset sales could force them to revalue their own investments and those of other funds they lend to, said Josh Rosner, managing director at New York-based investment-research firm Graham Fisher & Co.

``The value that assets are being carried at may well be proved to be far above'' what they're really worth, Rosner said.

The bailout is reminiscent of that of Long-Term Capital Management LP in 1998, which lost $4.6 billion, Rosner said. At the time, lenders met and agreed to take a 90 percent stake in the Greenwich-based fund and slowly liquidated the assets to limit the impact of its collapse.

An ``unraveling'' of the Bear Stearns fund ``threatens to have a ripple effect on valuations,'' Kathy Shanley, a senior analyst in Chicago at Gimme Credit LLC, an independent corporate- bond researcher, said in a report today.

Halted Redemptions

The 10-month-old fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund and run by Bear Stearns senior managing director Ralph Cioffi, began with about $600 million in investors' money. It halted redemptions after investors sought to withdraw $300 million by June 30.

The fund has lost about 20 percent this year, while a sister fund that uses less borrowed money is down a smaller amount. Blackstone Group LP, based in New York, helped prepare the rescue plan, the New York Post reported today.

The fund had borrowed at least $6 billion. Other lenders include London-based Barclays PLC, which would invest about $250 million under the plan proposed yesterday, the Wall Street Journal reported today. New York-based Citigroup Inc. is leading a committee of creditors that may supply another $250 million, the Journal said, citing people it didn't identify.

UBS Shutdown

UBS AG, Switzerland's biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit last month, after losses executives linked to turmoil in the mortgage-bond market, where delinquencies and defaults on so-called subprime loans, or ones to bad-credit borrowers, are at the highest since 1997.

The Bear Stearns fund's positions that were to be sold this week included bonds from a variety of CDO types, including securities mostly backed by subprime-mortgage bonds, buyout loans and other CDOs, according to offering documents.

Bank of America Corp. this week is also offering some other CDO securities on behalf of the Bear Stearns fund as part of a previously planned sale, the person said. Louise Hennessy, a spokeswoman for the Charlotte, North Carolina-based bank, Danielle Romero-Apsilos, a Citigroup spokeswoman, and Tom Vogel, a Barclays spokesman, all declined to comment.

CDOs are investment vehicles that repackage loans, derivatives and bonds into new securities, providing managers with ongoing fees and underwriting revenue to banks. Some of that new debt gets higher credit rating than the underlying assets and some offers potentially greater return.

Hedge funds are private, largely unregulated pools of capital whose managers participate substantially in any gains on the money invested.

Weakening Demand?

The record pace at which CDOs are being created may be obscuring weakening investor demand, Pamela Brill, a portfolio manager at Allstate Investments LLC, said at a June 6 conference in New York.

``We've heard that there's decent amount of overhang of securities left over, that they've securitized but haven't been able to sell, and they're still holding a couple of months after the fact,'' said Brill, whose unit of Northbrook, Illinois-based insurer Allstate Corp. owns about $2 billion in CDO securities.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: June 19, 2007 15:31 EDT