NEW YORK (Reuters) - Bear Stearns Cos BSC.N and its former chief executive denied on Monday market speculation that the investment bank faced a cash crunch, helping pare losses after its shares had fallen to a five-year low.
Bear’s chairman of the executive committee, Alan “Ace” Greenberg, told Reuters speculation that the investment bank and securities firm was facing liquidity problems were “totally ridiculous.”
Shares of Bear had fallen as much as 14 percent to a five-year low amid speculation that the bank, which suffered heavy mortgage-related losses last year, was facing a cash crunch.
“They’re totally ridiculous,” Greenberg, a legendary trader who ran the investment bank as CEO from 1978 to 1993, said of the market talk. “They’re rumors. What can I do about it?”
After the denial, Bear shares pared their losses. In afternoon trading, the stock was down $7.55, or 10.8 percent, to $62.53 a share, after sinking as low as $60.34 earlier. The overall stock market was weak, with the Standard & Poor's 500 index .SPX off 1.3 percent.
Bear spokesman Russell Sherman also denied the speculation, saying: “There’s no truth to the liquidity rumors in the marketplace.”
But investors in several financial markets seemed prepared to believe the worst about the firm, which made part of its fortune trading mortgages and other debt over the years, in this period of intense stress in the financial services sector.
The cost of insuring $10 million of Bear Stearns debt for five years widened to as much as $650,000 per year in the credit default swaps (CDS) market, according to broker Phoenix Partners Group. The swaps closed on Friday at the equivalent of
$452,000.
Options traders also reacted aggressively to rumors of liquidity concerns. In afternoon trade, roughly 133,000 puts compared with 52,000 calls had changed hands in Bear Stearns, four times the normal volume, according to option analytics firm Trade Alert.
“Put volume more than tripled in morning trade as traders bought puts seeking protection against further share losses over the next 10 days,” said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.
The rumors pushed the premium of the March $60 put to a high of $6.30 a contract, but the price came off later to $3.80, Darst said.
The credit market crisis has taken its toll on Bear, the fifth-largest U.S. investment bank.
Bear reported a fourth-quarter loss of $854 million, its first ever, after taking a $1.9 billion mortgage-related write-down. Analysts have over the past month slashed expectations for its first-quarter earnings.
According to a Keefe, Bruyette & Woods research report last week, Bear Stearns had $600 million in leveraged loan exposure, $760 million of CDO exposure and $15 billion of commercial real estate at the end of November.
Keefe Bruyette analyst Lauren Smith estimates Bear will write down $510 million from the value of these assets in the first quarter to reflect the falling prices in these hard-hit markets.
Other financial firms have also been hurt and some are responding by looking to cut staff. Investment bank Lehman Brothers Holdings Inc LEH.N is laying off about 1,430 people, or 5 percent of its work force, a person briefed on the matter told Reuters on Monday. Lehman declined to comment.
In recent weeks, investors have punished shares of all the major banks and brokers amid renewed worries that deterioration in mortgage and other credit markets would generate a new round of losses that could eat into capital and cash reserves.
An index of S&P financial shares .GSPF was down 2.74 percent on Monday afternoon at 315.73, its lowest since May 2003.
“All of the financials have been under extreme pressure here. The kinds of declines that are being seen are depression-type declines,” said John Buckingham, chief investment officer at Al Frank Asset Management, which owns Bear Stearns and other financial stocks.
“We are actually underweight financials, and we certainly are having a lot more of them come on our buy-list, though,” added Buckingham.
Additional reporting by Muralikumar Anantharaman, Doris Frankel, Christina Cooke, Karen Brettell; Editing by Gerald E. McCormick and Tim Dobbyn
Our Standards: The Thomson Reuters Trust Principles.