The Wall Street Journal, in “Bear’s Stock is Acting Like It’s Name,” adds surprisingly little of substance to what’s already been reported on Bloomberg (see here and here), but the story’s downer tone is the last thing Bear needs at this juncture.
One element that has been missing from the mot press coverage but picked up on Bloomberg is how Bear is reaping its karma. It hasn’t gotten much cooperation from other Wall Street firms because they remember all too well how intransigent the firm was during the LTCM bailout in 1998. This Bloomberg exclusive is worth reading in its entirety, particularly for those interested in the blow-by-blow:
Bear Stearns Cos. is getting a taste of its own medicine.
It was Bear Stearns, the biggest broker to hedge funds, that nine years ago declined to join 14 other investment banks in the bailout of Long-Term Capital Management LP. Then last week, as New York-based Bear Stearns pleaded for help to rescue two of its hedge funds teetering on the brink of collapse, many of the same firms refused to come to its aid.
Merrill Lynch & Co., which pumped $300 million into LTCM, said no and seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Cantor Fitzgerald LP also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations.
“There is a good analogy to Long-Term Capital,” said Anthony Sanders, a former director of mortgage-bond research at Deutsche Bank AG who starts next month as a professor of finance and real estate at Arizona State University’s W.P. Carey School of Business in Tempe, Arizona. “They were all friends with Bear Stearns when they thought the spreads were huge. Now that the market has turned, Bear’s standing there like the lone grizzly.”
Without assistance from his Wall Street peers, Bear Stearns Chief Executive Officer James E. “Jimmy” Cayne, 73, was forced to salvage the healthier of the two funds, offering to put $3.2 billion of capital at risk in the biggest bailout since LTCM. Bear Stearns may dissolve the second fund after more than $600 million of investors’ money dwindled to less than $200 million.
The debacle, and the risks Bear Stearns faces in the mortgage-backed securities market, may cost the firm 7.2 percent of its earnings this year and wipe out more than $1.5 billion in market value as the stock declines, according to estimates by Sanford C. Bernstein & Co. analyst Brad Hintz. Shares of Bear Stearns, the second-largest U.S. underwriter of mortgage bonds, have dropped 17 percent since reaching a record in January, just before the subprime market started melting down.
The story includes this telling tidbit:
Credit-default swaps based on $10 million of Bear Stearns bonds rose $4,200 to $52,200, according to composite prices from CMA Datavision. The increase in the cost of the five-year contracts indicates a deteriorating view of the firm’s credit quality.
Oddly, the Journal did not mention one item, an SEC inquiry, which has the potential to be quite damaging. The Financial Times picked up on this thread:
The SEC has sent informal letters to Bear asking for details on how its two hedge funds fared so badly, sparking heavy redemption demands from investors and demands for repayment from creditors. Bear last week agreed to extend $3.2bn in loans to one of the funds. The other larger and more levered fund is still negotiating with creditors. Bear shares closed at $139.10 on Monday, a nine-month low.
The SEC inquiry is at a very preliminary, information gathering stage, people familiar with the matter said. It is also said to be part of a broader inquiry by regulators into the way banks and other publicly-traded companies are valuing their holdings of subprime loans at a time when losses appear to be rising quickly.
The fact that sales of existing homes are at their lowest point in four years and housing inventories are double the level of two years ago certainly isn’t helping matters either.
