The fallout from America’s mortgage woes crossed the Atlantic yesterday when it emerged that Barclays Capital is a key lender to a Bear Stearns hedge fund that is on the brink of collapse.

The investment banking arm of Barclays Bank has lent about $300 million to the fund, which has made highly leveraged investments in bonds backed by American mortgages that have backfired badly. Barclays is thought to be among the lenders looking to support the fund with additional finance, while other banks are attempting to extricate themselves and limit the damage.

JPMorgan Chase and Deutsche Bank, lenders to two struggling Bear Stearns hedge funds with high exposure to sub-prime mortgages, seized some of the bonds held by the hedge funds and planned to sell them in an attempt to minimise losses from the loans as falling mortgage bond valuations pushed the funds to the brink of collapse. The two funds are thought to have borrowed at least $6 billion between them.

But, at the last minute, JPMorgan and Deutsche both decided against auctioning the bonds – worth a total of about $700 million – because they were worried about the price they would fetch. They did not want to push down the price by flooding the market.

JPMorgan is thought to have used the threat of an auction to help to reach a deal with Bear Stearns to sell $400 million of collateral back to the hedge funds for cash. It is not clear what price the two banks agreed.

Merrill Lynch, another lender to the funds, put about $850 million worth of the assets up for sale. The bank sold only a small portion but is thought to believe that it has reduced its exposure enough for now and has halted the auction process.

Blackstone, which is advising the Bear Stearns funds, continues to talk to its bankers in an attempt to broker a rescue deal.

Barclays, Bear Stearns, Deutsche Bank, Merrill Lynch, Blackstone and JPMorgan declined to comment.

–– Two funds set up by Ritchie Capital Management, the US hedge fund, to invest in the “secondary” market for life insurance policies filed for bankruptcy protection in New York yesterday, listing debts of more than $811 million.

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