Bear Stearns calms subprime jitters

NEW YORK (Reuters) - Bear Stearns Cos. Inc. BSC.N, the No. 1 U.S. underwriter of mortgage-backed securities, posted an 8 percent rise in quarterly earnings on Thursday and calmed a jittery U.S. stock market when it said problems with risky subprime mortgages were largely contained.

"To date, problems in the subprime market have not spread to the broader mortgage market," Bear Stearns Chief Financial Officer Sam Molinaro told analysts.

Lee Forker, president of New England Research & Management, said it was far too early to say subprime problems are contained when the market is only in the early stage of deterioration.

"He's going to have to eat those words in a matter of months," said Forker, whose company owns shares of Bear Stearns and other investment banks. "I think this is going to be very analogous to the Internet bubble of 2000."

Nevertheless, Bear Stearns shares were up more than 2 percent after the New York investment bank beat Wall Street's profit expectations.

The investment bank said net income in the first quarter ended on February 28 increased to $554 million, or $3.82 a share, from $514 million, or $3.54 a share, a year earlier.

Analysts on average had been expected $3.80 a share before one-time items, according to Reuters Estimates.

The company's performance paled beside Wall Street's No. 1 investment bank, Goldman Sachs Group Inc. (GS.N), which reported a 29 percent surge in quarterly profit earlier this week.

Bear Stearns' net revenue rose 14 percent to $2.5 billion.

Fox-Pitt Kelton analyst David Trone said in a research note that he had expected stronger revenue growth. He has an "overweight" rating on the stock.

Bear Stearns said investment banking net revenue fell 17 percent from the fourth quarter and rose only 3 percent from the year-earlier first quarter.

Investment banking, however, isn't the company's flagship business. Bear Stearns is the U.S. leader in packaging pools of mortgages into bonds, a process called securitization that raises fast cash for investment banks while creating a product bought by pension funds and others. Some of those deals include subprime loans -- mortgages extended to borrowers with weak credit. Such mortgages are suffering from a rising wave of defaults.

But in that turmoil is a big opportunity for Bear Stearns and other Wall Street investment banks. Molinaro said he expected to see large, bulk sales of distressed mortgages over the next several months.

"We think that the dislocation that's going on here will only provide more opportunity for us," Molinaro said on a conference call. "... There's a lot of assets floating around in the market looking for bids."

Meanwhile, Bear Stearns' residential mortgage-related revenues decreased in the latest quarter, but Molinaro said that's only a small part of the company's overall business. Molinaro expects to see a significant drop in total U.S. mortgage originations this year, with activity for the riskiest loans falling as much as 30 percent.

The investment bank's fixed-income business, its flagship market, saw revenue surge 27 percent to $1.1 billion.

The company's stock, which rose $3.46 to $148.75 on the New York Stock Exchange, is off about 8 percent this year, compared with a 3 percent rise in the AMEX Securities Broker Dealer index .XBD.