Bear Stearns, the investment bank where the collapse of two hedge funds was an early clue to the severity of the credit crisis, has posted the first loss in its 84-year history.
The company plunged into the red in the final three months of its financial year after having to write off $1.9bn (960m) from the value of its holdings of mortgage-related assets.
That writedown was significantly more than Wall Street had been expecting, and meant that the company recorded a loss of $854m in the quarter ended 30 Nov-ember. For the year, net income was $233m, down 89 per cent from 2006, and the company predicted the challenging trading conditions would continue.
Bear Stearns was one of the biggest creators and traders of mortgage-related derivatives, instruments such as mortgage-backed securities and collateralised debt obligations (CDOs) which have collapsed in value this year. Americans have begun defaulting on the underlying loans in record numbers, and investors believe there will be even more repossessions in the coming year as interest rates rise.
Jimmy Cayne, its chief executive, said he and fellow executives would share in the pain. "When Bear Stearns became a public company, consistent with our entrepreneurial roots, we designed our executive compensation programmes to pay for performance," he said. "In a year in which we produced unacceptable results, the plans are working as they were designed and the members of the executive committee will not receive any bonuses for 2007."
Bear Stearns is facing mounting legal problems related to the collapse of two in-house hedge funds in the summer. This week, Barclays launched a lawsuit saying it was lured into lending money to the funds under false pretences, and fund manager Ralph Cioffi has left Bear Stearns amid allegations he transferred $2m of his own money out of the funds before they collapsed.
Yesterday, Sam Molinaro, its chief financial officer, denied that these and other headlines had damaged Bear Stearns' reputation, and on a conference call with analysts he dismissed their suggestions that they were having an effect on profits across the bank.
Revenues at the investment bank were down 44 per cent in the final quarter, and most other divisions missed Wall Street targets.
Bear Stearns shares, though, rose in early trading in New York. "The devil you know is better than the devil you don't know," explained Jeff Harte, analyst at Sandler O'Neill. "Management appears to have 'cleared the decks' of subprime/CDO exposures, and that removes uncertainty."
There was also relief that Bear Stearns has not had to seek emergency funding to shore up its balance sheet. Morgan Stanley, UBS and Citigroup took money from sovereign wealth funds the governments of China, Singapore and Abu Dhabi.
Mr Molinaro argued that the losses in the mortgage business were at least not a surprise. Unlike some rivals, it understood the risks it was taking, but had simply made the wrong call on the markets.Reuse content