Analysts got Bear Stearns wrong, too

WASHINGTON (Reuters) - Relying on Wall Street research analysts to warn about the meltdown of Bear Stearns Cos was a losing proposition.

The collapse of the fifth-largest U.S. investment bank dealt another black eye to analysts, who didn't see it coming as they focused on Bear's longer-term business and operations. Some investors said the failure stemmed more from market psychology -- a loss of confidence in dealing with Bear that spiraled out of control.

Up to the very end, and even afterward, analysts charged with knowing Bear's business intimately were largely sanguine on the bank's ability to ride out the credit crisis.

Some even thought Bear shares could rise above $90 per share. That's far above the price of $2 per share that JPMorgan Chase & Co agreed on Sunday to pay for the 85-year-old firm. Bear agreed to the U.S. Federal Reserve-backed bailout after clients stopped doing business with the company.

"Analysts have to recognize that, inevitably, liquidity changes," said Marshall Front, chairman of Front Barnett Associates LLC in Chicago, which owns shares of several commercial banks.

In this case, they didn't -- at least not to the extent it did for Bear.

As of March 13, the day before Bear revealed its stricken state, among 15 analysts surveyed by StarMine Corp, a unit of Reuters, five rated Bear "buy" or the equivalent, while 10 rated it "hold." None rated it "sell."

Even after Chief Executive Alan Schwartz the next day said liquidity had deteriorated rapidly, only two of the analysts cut their ratings, according to StarMine. And while the three major credit rating agencies all downgraded Bear on Friday, each continued to assign it investment-grade ratings.

TOO BULLISH

Bear shares closed Thursday at $57, but many analysts thought they could head higher. UBS AG's Glenn Schorr thought the stock could reach $94 within 12 months. Banc of America Securities' Michael Hecht thought it could reach $92.

Even Deutsche Bank Securities Inc's Michael Mayo, often more bearish on the banking industry than many of his rival analysts, was too optimistic. On March 11, he cut Bear's price target to $72 per share from $90.

He also wrote, prophetically as it turned out, that "concerns over lingering balance sheet issues could also impact counterparty relationships," though he did not say it would lead to Bear's collapse. He also said credit-related losses "could be transitory in nature and could reverse."

The analysts could not immediately be reached for further comment.

Analysts have faced increased scrutiny since regulators led by then-New York Attorney General Eliot Spitzer pushed the financial services industry to separate analyst research from investment banking. As a result of the reforms, analysts have grown much more likely to assign hold and sell ratings.

But some analysts said Bear's downfall stemmed from the market deciding the business wasn't viable.

"A company is only as solvent as the perception of its solvency," wrote Meredith Whitney, an analyst at Oppenheimer & Co, in a March 14 report. She downgraded Bear that day to "underperform," equivalent to a "sell."

Front said: "I don't know if the average individual, or even the average analyst, has the qualifications or the information to make judgments as to the value on a mark-to-market basis of assets held by many institutions, because they're essentially black boxes."

MORE TROUBLE AHEAD?

Analysts are now warning of more trouble ahead. They said the sorts of problems that felled Bear could damage rivals.

"The financial model of all investment banks seems called into question at this juncture," Hecht wrote on March 16, after JPMorgan announced the buyout. He put his rating and target price for Bear under review.

And Whitney, who in October correctly projected that Citigroup Inc would cut its dividend and raise $30 billion of capital, predicted a "major negative revaluation" that could halve some financial companies' share prices.

David Killian, a portfolio manager at StoneRidge Investment Partners LLC in Malvern, Pennsylvania, said it's investors' responsibility to beware.

"Issues that brought down Bear Stearns were not economic per se," he said. "It was a mass exodus of clients and counterparties, driven by a complete lack of confidence, and that's difficult to model. It's investors' responsibility to weigh the probability of different outcomes."

(Editing by Gary Hill)