Trading with Bear Stearns resumes amid grim future

NEW YORK (Reuters) - After shunning Bear Stearns late last week as it sank into a liquidity crisis, Wall Street has resumed trading with the brokerage now that it has JPMorgan's backing, market sources said on Wednesday.

Still, the pace of transactions remains tentative.

Traders say Bear's volumes will never return to where they were before last week's liquidity crisis, in which Bear Stearns clients withdrew what media reports have said amounted to $17 billion from the bank. That had led to JPMorgan, with the backing of the Federal Reserve, stepping in with rescue financing and then with a proposal to buy the company for $2 a share.

Bear Stearns could not immediately be reached for comment.

One hedge fund manager, who declined to be named, said that last week his firm shifted money from Bear's prime broker unit on worries that his money might be tied up if Bear filed for bankruptcy. He is back trading with the bank this week.

The manager, who runs a $1 billion fund, said a senior JPMorgan official called him and sent around a written guarantee that the bank would back his trades through Bear.

"We're still clearing there and will continue to clear there," said the manager.

While the backing of JPMorgan has restored the confidence of Bear's counterparties, the hold-up in trading now centers more on Bear's staff.

CNBC said on Monday JPMorgan will let go of half of Bear's 14,000 employees. JPMorgan dismissed the CNBC report, calling it "a fabricated number."

But counterparties wonder why Bear traders would take risks and make trades if they do not know how long they will have their jobs and how they are going to get paid.

Consequently, many Wall Street traders are reluctant to conduct long-term trades with Bear if their Bear counterparts were to leave or to be laid off by JPMorgan, the source said.

Still, Wall Street players, while wary of Bear's plight, said there was no reason to refrain from doing business with Bear.

"There is no worry with them because JPMorgan is guaranteeing their trades. There is no counterparty risk right now," a source at one New York dealer said.

(Reporting by Richard Leong, Steven Bertoni and Dane Hamilton, Editing by Chizu Nomiyama)