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Funds News

Bear rivals say courting prime broker clients

NEW YORK, Aug 24 (Reuters) - Bear Stearns Cos Inc's BSC.N rivals are aggressively courting the investment bank's prime brokerage customers, telling them it's too risky to stay while the firm deals with fallout from the subprime mortgage crisis.

Senior prime brokerage officials with four major Bear rivals told Reuters they have been winning over business from Bear Stearns, but several hedge fund managers said they are giving just as much business to Bear as before, and one said he has moved more toward Bear in recent weeks.

Bear Stearns spokesman Russell Sherman says the firm continues to win business and its client balances are up from a year ago. Bear is traditionally one of the top three prime brokerages, which together control about two-thirds of the market.

The stakes are high, with the business generating at least $11 billion in revenue for banks in 2006, according to Boston Consulting Group.

Prime brokers perform services for hedge funds such as clearing trades, financing positions and lending securities. They have scaled back credit to many hedge funds as the subprime meltdown has wreaked havoc in stock and bond markets.

Not all brokers have been cutting credit equally. The prime brokers that have scaled back the least -- often broadly diversified “universal” banks rather than stand-alone investment banks -- are winning more business now.

"Institutions like Citigroup C.N are now reaping the benefits of a large balance sheet and staying power," said Alice Hackett, co-head of prime finance at the world's largest bank. Hackett declined to comment on Bear Stearns.

Some prime brokerage heads at major banks, who declined to be named, said they are signing up customers who used to work mainly with Bear Stearns but were concerned about the investment bank’s ability to provide as much financing.

Officials at banks also say hedge funds that work with multiple prime brokers are giving more business to the universal banks and less to Bear.

But some of that may be hype from banks looking to trash a competitor’s business. Bear Stearns’ shares have fallen some 30 percent this year as two hedge funds that it managed failed, and turmoil in the fixed income markets raised concerns about Bear’s profit growth.

Several hedge funds told Reuters they are happy with Bear despite its recent difficulties.

“We’ve had no problems with Bear, and I can’t say enough good things about them,” said Jeff Saye, president of mortgage hedge fund Saye Capital in Manhattan Beach, California.

“If anything, we’re giving them more business now, because we find some of their competitors have become more difficult to deal with and Bear Stearns is less jittery,” he added.

Another hedge fund manager said he had just signed up with Bear. He said that sales staff at competing prime brokers frequently suggested that Bear was risky to work with.

“There’s no honor among thieves,” the manager said.

SOUR TIMES

Bear Stearns, Goldman Sachs Group Inc GS.N and Morgan Stanley MS.N are traditionally the top three prime brokers.

Bear Stearns’ prime brokerage business is part of its global clearing segment, which provided about 12 percent of the company’s $9.23 billion of revenue in 2006.

There’s good reason to believe that the prime brokerage operations of Bear Stearns and other investment banks are losing business to universal banks now, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

Defaults among mortgage borrowers with weak credit have risen dramatically. That has tripped fear in the market for bonds backed by those mortgages. As tumult spreads to other markets, banks have been forced to hold assets on their balance sheet that they had expected to package into bonds to sell to investors.

Universal banks can often stand to hang onto more assets, but if investment banks are stuck with massive amounts of loans they cannot resell, they could have less capacity for extending credit to hedge funds, Hintz said.

(Additional reporting by Joseph A. Giannone)

(Reporting by Dan Wilchins and Dane Hamilton)

((Editing by Richard Chang; Reuters Messaging: dan.wilchins.reuters.com@reuters.net; +1 646 223 6320)) Keywords: BEARSTEARNS PRIMEBROKERAGE/

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