The move overshadowed news on Thursday that two Irish-listed hedge funds filed for bankruptcy protection after making losses of more than 520m the blamed on a co-investor's alleged fraud.

The Ritchie Risk-Linked Strategies Trading funds sought bankruptcy protection after failing to make a profit from life insurance policies it had bought from a Philadelphia-based company called Coventry First, which it is suing. The Ritchie funds buy the policies at less than the death benefit from wealthy holders over the age of 65 and then package them as securities . . . a specialty on the Dublin market . . . to be sold to investors who ultimately collect the death benefits down the line.

But Ritchie, according to its director, couldn't find takers for the securitisation, since some of the policies were "nonconforming", a term used more commonly as a euphemism for subprime loans.

The Ritchie funds were setup in 2005 and scheduled to wind down in 2015, according to documents filed with the Companies Registration Office, indicating a ten-year bet on the holders' life expectancy. Ritchie Capital Management is seeking loans to help it continue in this business.

Bear Stearns told lenders to the High-Grade Structured Credit Strategies Fund this weekend that it would assume their loans, said the people, who declined to be named because the plan is confidential. The New York-based firm made the offer after creditors including Merrill Lynch & Co, JPMorgan Chase & Co and Lehman Brothers Holdings Inc put some of their collateral up for sale to investors.

Bear Stearns increased efforts to salvage the fund, one of two that made bad bets on collateralised-debt obligations, as concern about a possible collapse sent stocks and bonds of financial companies lower.

An agreement with creditors would prevent a fire sale of the collateral, while increasing the risk to Bear Stearns, the second-biggest underwriter of mortgage bonds.

"Bear needs to put this behind it as soon as possible, " said Peter Goldman, who helps manage $600m at Chicago Asset Management, including shares of Bear Stearns. "The firm might take on some of the risk of the fund they didn't have before, but they're a bond shop and they wouldn't take on risk they shouldn't."

The Bear Stearns fund lost about 10% of its value this year, while the related fund, the 10month old High-Grade Structured Credit Strategies Enhanced Leverage Fund, lost about 20%, according to people familiar with the matter.

Both funds are run by Ralph Cioffi, 51, a senior managing director.

The funds speculated in highly-rated CDOs . . . securities backed by bonds, loans, derivatives and other CDOs - . . . that were hurt in March and April as defaults on subprime mortgages to people with poor or limited credit histories increased. The fund also lost on opposite bets against homeloan bonds, which backed many of its CDOs.

Bear Stearns spokeswoman Elizabeth Ventura declined to comment. Lehman spokesman Randy Whitestone also declined to comment as did Adam Castellani, a spokesman for JPMorgan.

Investors from hedge funds to pension funds and foreign banks have snapped up CDOs as a new way to invest in debt, making it the fastest-growing market and pushing the amount outstanding to more than $1 trillion.

CDOs trade infrequently and holders rarely have comparable sales to use when valuing the securities on their books. Forced sales may have required investors to write down those values, potentially causing billions of dollars of losses.

"The problem is not what we see happening, but what we don't see, " said Joseph Mason, associate professor of finance at Drexel University in Philadelphia and co-author of an 84-page study this year on the CDO market. "We don't know the price of these assets.

We don't know which banks are exposed to this sector.

These conditions are the classic conditions for financial crises across history."

The bailout of the fund would be the largest since Long-Term Capital Management LP, which received $3.5bn from 14 lenders in 1998.

The Greenwich, Connecticutbased fund, run by John Meriwether, lost $4.6bn.

In the case of Long-Term Capital, lenders agreed to take equity stakes in the fund after New York Federal Reserve President William McDonough called the heads of the firms together. They then sold assets over time to limit the impact of its collapse.

Bear Stearns's proposal doesn't involve taking equity.

Instead, the firm would become a lender to the fund, its loan secured by the assets of the fund.

Bankers and money managers bundle securities into a CDO, dividing it into pieces with credit ratings as high as AAA. The riskiest parts have no rating because they are first in line for any losses. Investors in this so-called equity portion expect to generate returns of more than 10%. The first CDOs were created at nowdefunct Drexel Burnham Lambert Inc in 1987. Sales reached $503bn in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service.

CDOs may have lost as much as $25bn because of subprime defaults, Lehman Brothers analysts estimated in April.

Bear Stearns shares rose for the first time in four days on Friday after Merrill decided against selling all its collateral. The stock dropped $1.22, or 0.8%, to $144.59 at 11:25am in New York Stock Exchange composite trading.

The perceived risk of owning corporate bonds was little changed after reaching the highest since September earlier this week.