ETF News

Bear Stearns Stock Plunges Amid Risk Worries

NEW YORK (Reuters) - Shares of Bear Stearns Cos BSC.N plunged Thursday amid worries that hedge funds and other traders are nervous about entering into long-term trades with the Wall Street bank weakened by heavy mortgage market losses last year.

The fifth-largest U.S. securities firm, known as a trader and underwriter of mortgages and other debt, in recent days has batted down speculation it is strapped for cash. Executives say it has enough capital and cash to weather the current storm.

Yet hedge funds and banks handling long-term trades, such as credit-default swaps, are being extra cautious when Bear is a counterparty, the Wall Street Journal reported Thursday.

Bear shares fell as much as 15 percent to its lowest level since October 2002 earlier in the session. Shares have declined nearly 27 percent overall this week.

Credit default swaps widened 1.2 percentage points to 700, according to Phoenix Partners, which means the cost of insuring $10 million of Bear debt for five years now costs $700,000. It was $300,000 two weeks ago.

Trading in Bear put options was also active, suggesting investors expect Bear common shares to fall further. Roughly 191,000 puts, compared with 67,000 calls, on Bear stock had changed hands by 12:30 p.m., according to Trade Alert.

The Wall Street Journal reported trading clients of rivals like Goldman Sachs and Morgan Stanley asked those firms to be counterparties to Bear for completed trades. Meanwhile some hedge funds that use Bear as a prime broker have been shifting portions of their business to other firms, the paper said.

In an interview, Bear CFO Samuel Molinaro told the paper there is no truth to speculation of deep trouble at the firm. Other dealers, hedge funds and other investors said they are continuing to do trades with Bear, he said.

Money manager Anton Schutz of Mendon Capital, who has no position in Bear, said he does not plan to scale back his prime broker relationship with Bear but is monitoring the situation.

“A lot of the collateral they’re taking from some of these failed hedge funds is, in normal environments, fine collateral. But in today’s world, there’s no liquidity. If you want liquidity, you can’t get it,” Schutz said.

The bearish report comes amid a growing consensus that the U.S. economy is already in recession, and as the rolling subprime mortgage storm claims new victims on a daily basis.

Earlier Thursday, private equity firm Carlyle Group said a mortgage finance affiliate, Carlyle Capital Corp Ltd CARC.AS, failed to reach a deal with its lenders and said banks were seizing mortgage securities held as collateral.

“The Carlyle implosion is clearly a factor negatively impacting financial stocks and investment bankers,” said Jon Najarian, co-founder of in Chicago. “Bear Stearns has been the weakest of the sector and it’s clearly feeling the most pain as traders and investors hit the exits.”

One trader said Thornburg Mortgage TMA.N, a struggling jumbo home lender, may have sparked the latest Bear worries.

“There are some rumors around that Bear Stearns is a counterparty to a fair amount of Thornburg assets, so they likely own the bonds seized as collateral,” said Michael James, senior trader at Wedbush Morgan in Los Angeles.

That said, Najarian notes overwhelmingly negative views may represent a capitulation marking the bottom of a cycle. “There is both blood in Wall Street and panic in Bear Stearns. Both are necessary for capitulation to truly exist.”

Also, Standard & Poor’s released a report Thursday that suggested the global financial services industry has passed the halfway mark in terms of mortgage-related write-downs and that “the end of write-downs is now in sight.”

Total losses from collateralized debt obligations and mortgage bonds could reach $285 billion worldwide, S&P said.

Additional reporting by Dena Aubin, Doris Frankel, Kristina Cooke and Dan Wilchins; Editing by Derek Caney, Gary Hill