Abet Chichi2

[bob3]

Bear Stearns: Worst Quarter Ever!

Wall Street was braced for a quarterly loss at Bear Stearns on Thursday, but the extent of the firm's first quarterly deficit since it was founded in 1923, far surpassed expectations. The poor results will cost Bear's top brass their 2007 bonus payments.

As with its competitors--other than Goldman Sachs (nyse: GS - news - people )--the root of Bear's troubles was the global debt crisis, which was routed in the U.S. subprime mortgage market. Bear was an early victim, shocking the Street in July when two of its major hedge funds collapsed.

On Thursday, The brokerage said it suffered a loss of $859 million, or $6.90 a share, for its fourth quarter, which ended Nov. 30, down from a profit of $558 million, or $4.00 a share, for the year-ago period. The firm also announced $1.9 billion in additional write-downs as it recalculated the value of its battered portfolio.

The results shocked Wall Street, where analysts--whose track record at predicting earnings in their own industry leaves something to be desired--were looking for a loss of just $1.79 a share. According to the Associated Press, no one in the analyst pool predicted a deficit greater than $2.45.

Shares of Bear Stearns (nyse: BSC - news - people ) fell 50 cents, or 0.6%, to $90.10 in early afternoon trading.

The profit report comes just one day after Morgan Stanley (nyse: MS - news - people ) surprised the Street with a steep quarterly loss and $9.4 billion in write-downs. (See "Morgan Stanley's Bad Moment") The rapidly depreciating value of mortgage-related assets and the general turmoil in the credit markets has punished Wall Street's power houses.

In a mea-culpa moment, Morgan Stanley's Chief Executive Officer John Mack said he would not accept a bonus this year. Bear Stearns followed suit. Senior executives, including CEO James Cayne, will also go home without bonuses for 2007. Like Mack, who expressed his disappointment in the fourth-quarter numbers, Cayne told investors that he was not pleased with the results.

"We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses," said Cayne. "Our underlying fixed-income franchise remains strong and we have taken steps to size the division to market conditions." He added, "In a year in which we produced unacceptable results, the plans are working as they were designed -- and the members of the executive committee will not receive any bonuses for 2007."

In the troubled capital markets division, which includes fixed-income, the company said it experienced a loss of $956 million. The fixed-income unit alone lost $1.5 billion in the quarter. "Results for 2007 were heavily influenced by the severe market conditions across the fixed-income sector. More broadly, the repricing of credit also led to significantly lower net revenue levels due to illiquidity in the markets as trading activity levels deteriorated across the spectrum of fixed income products," the company said. The unit recorded $1.9 billion in recorded write-downs for the period, which is larger than the previous estimate of $1.2 billion, the company released in November. However, before hedges, the company actually suffered $3.2 billion in write-downs, said Bear's Chief Financial Officer Sam Molinaro in a conference call, according to Reuters. During the period, Bear Stearns unwound the remainder of its collateralized debt obligations, or CDOs.

The company's investment banking unit (another section of the capital markets division) also underperformed. Investment banking sales fell 44% to $205 million, from $364 million, due to lower fees for underwriting services. Elsewhere, the company's equity trading business saw sales fall 11% to $384 million, from $430 million.

Aside from the black eye of fixed income, the rest of the company performed relatively well--but far from spectacular. The clearing business saw sales rise 1.8%, to $276 million, from $271 million. Meanwhile, the wealth-management division saw sales rise 10.1%, to $272 million, from $247 million.

As evidenced from the numbers, the credit markets have continued to deteriorate from the third quarter to the fourth. In September, the company said it still managed to eke out a gain $166.1 million, although the profit had declined 61.6% from $432.2 million for the year ago period. (See: "Bear Stearns Assuages Subprime Fears" ) In a conference call, Bear Stearns assured investors that second-half of 2007 would stand out as the bottom of the credit crisis. CFO Molinaro said sales will be higher in 2008 than this year.

Also, Bear Stearns has more than write-downs to wrestle with these days. On Wednesday, Barclays Bank (nyse: BCS - news - people ) filed a suit against the firm in a New York federal court, accusing Bear Stearns of failing to accurately represent the value of the two notorious hedge funds that collapsed in July. Barclays alleges that Bear Stearns withheld important financial information from investors

In an attempt to slow the bleeding from the balance sheets, Bear Stearns has also issued a slew of pink slips. Last month, Bear Stearns said it would cut 650 jobs, or 4% of its worldwide workforce. The November cut was the company's third round of layoffs since the start of the mortgage crisis this summer. With credit markets still effectively frozen, job cuts have been widespread and many believe hiring freezes will persist through 2008. Lehman Brothers (nyse: LEH - news - people ) has laid off 2,450 people, UBS (nyse: UBS - news - people ) has said it plans to fire 1,500 workers, Morgan Stanley cut 600 people and Merrill Lynch (nyse: MER - news - people ) was rumored to be slashing 15% of its work force in the fixed-income department. (See: "Bear Without Us" )

In another interesting move, the company also recently teamed up with Citic Securities, a Chinese investment firm. (See: "Bear Stearns And Citic Swap Stakes" ) In October, the firms agreed to invest $1 billion in each in one another. Bear Stearns got a 2% stake in Citic, while Citic received a 6% in Bear Stearns. Morgan Stanley also turned to China to shore up its balance sheet. (See "Chinese Cash Plugs Morgan Stanley's Hole")

Other financial stocks were down today, Lehman Brothers dropped 0.7%, or 41 cents, to $61.48, while Merrill Lynch dropped 1.9%, or $1.03, to $53.70, in early afternoon trading.

http://www.forbes.com/markets/2007/12/20/bear-stearns-update-markets-equity-cx_er_1220markets16.html

Courtesy...wonderbuy