Bear Stearns has replaced Richard Marin, its head of asset management, in an attempt to restore investor confidence as two of its hedge funds stand on the brink of collapse.

Jeffrey B. Lane, a veteran of Lehman Brothers, replaced Mr Marin as chairman and chief executive of Bear Stearns Asset Management, with immediate effect.

Bear Stearns, traditionally regarded as the bond king of Wall Street, has been hugely embarrassed by the sudden deterioration of two highly leveraged hedge funds, which have invested heavily in securities backed by high-risk sub-prime mortgages.

This week James Cayne, the Bear Stearns chief executive, drafted in Thomas Marano, his top mortgage trader, to lead the rescue of one of the funds. However, the bank’s reputation has taken such a hit that Mr Cayne has decided to back up Mr Marano’s reassignment with a more radical overhaul.

“Our focus is on restoring investor confidence in BSAM, serving our clients with excellence and assuring them of our commitment to provide them with the highest quality asset management products and services,” Mr Cayne said.

Mr Marin is acting as an adviser to Mr Lane, who has also held senior positions at Travelers Group and Neuberger Berman, the advisory firm.

Last week Bear Stearns was forced to agree a $3.2 billion (£1.6 billion) injection of cash into one of its struggling hedge funds to prevent lenders from calling in their debts. This would have been the largest bailout of a hedge fund since Long-Term Capital Management collapsed in 1998. The bank has scaled back the cash infusion to $1.6 billion after selling some of the fund’s assets at a reduced price.

Bear Stearns is the most high-profile victim of the plunging valuations of bonds and other financial instruments backed by sub-prime mortgages after a jump in defaults on high-risk home loans.

Its two struggling funds are thought to have invested about $15 billion between them, almost all of it financed with borrowings.

Many of the so-called mortgage originators, which make the original loan to the home-owner, have gone bankrupt, with New Century and ResMae among the most prominent. But the fallout is spreading because many of these loans were packaged into bonds and sold on to hedge funds and institutions.

Analysts fear that Bear Stearns losses are only the tip of the iceberg. Institutional Risk Analytics, a Californian company that writes computer programs for accountants, said yesterday that pension funds and institutions face losses of as much as $250 billion from investments in collateralised debt obligations (CDOs) alone.

There are about $1 trillion of CDOs – pools of bonds and loans – in circulation, and they are dominated by sub-prime mortgage-backed securities.

The lenders themselves are making far fewer high-risk home loans after two years of lax lending, which increased significantly the value of new mortgages written and paved the way for today’s defaults.

The value of new sub-prime mortgages written in the US is on course to halve this year, to about $300 billion, according to figures from Inside Mortgage Finance, an industry newsletter.

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