Bear Stearns Makes $1 Billion Bet on Subprime Market Decline

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Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, is betting more than $1 billion that subprime home loans and bonds will continue to decline.

The wager, a ``short'' position on subprime mortgage securities, was increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.

The sinking value of assets tied to mortgages led to Bear Stearns's fourth-quarter loss of $854 million. The company, the fifth-largest U.S. securities firm by market value, dropped 46 percent in New York trading last year, more than any Wall Street rival, leading James ``Jimmy'' Cayne to hand the chief executive officer role to Alan Schwartz last month.

``We have significantly reduced our exposures in one of the most problematic exposures that we've been dealing with,'' Molinaro said.

Two Bear Stearns hedge funds that invested in securities tied to mortgages collapsed in July, prompting investors to shun the debt. Bear Stearns had to bail out the funds and take possession of many of the securities.

The world's largest banks and securities firms have reported at least $146 billion of writedowns and credit losses stemming from the ensuing credit-market contraction, according to Bloomberg data.

About 30 percent of Bear Stearns's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz. The company's $1.9 billion mortgage writedown wiped out revenue in the three months ended Nov. 30.

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关键词：Subprime Billion Decline Stearns market market makes Bear Billion Bet

One of the major player is shorting ABS, it seems the crisis will continue.

(Update)

Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, has more than $1 billion of trades that profit if subprime home loans and bonds continue to deteriorate.

The ``short'' positions on subprime mortgage securities increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.

The sinking value of assets tied to mortgages led to Bear Stearns's fourth-quarter loss of $854 million, and Molinaro said today that one of the firm's biggest mistakes was ``not being conservative enough and bearish enough on the subprime market.'' The firm has reversed ``long'' subprime trades that stood at $1 billion at the end of August, Molinaro said.

``There's definitely a lot of short plays out there,'' said Mark Adelson, a founding member of Adelson & Jacob Consulting in Long Island City, New York. Some subprime bonds ``could easily be bad enough that they don't pay off a penny,'' said Adelson, a former Nomura Holdings Inc. mortgage analyst.

In an interview after Molinaro's remarks, Bear Stearns spokesman Russell Sherman said the New York-based firm's subprime trades are a ``hedge'' against potential losses on investments in higher-rated mortgages, he said.

Offsetting Positions

``We are using short positions to offset other long positions in our mortgage inventory,'' Sherman said. He didn't provide details on specific trades.

The company, the fifth-largest U.S. securities firm by market value, dropped 46 percent in New York trading last year, more than any Wall Street rival, leading James ``Jimmy'' Cayne to hand the chief executive officer role to Alan Schwartz last month.

Bear Stearns fell $2.36, or 2.8 percent, to $80.67 in composite trading on the New York Stock Exchange at 4:10 p.m.

Last year's performance by Bear Stearns contrasts with that of hedge fund manager John Paulson's Paulson & Co., which made $2.7 billion in fees in the first nine months of the year by betting against subprime-mortgage bonds as more borrowers fell behind on monthly payments.

Two Bear Stearns hedge funds that invested in securities tied to mortgages collapsed in July, prompting investors to shun the debt. Bear Stearns had to bail out the funds and take possession of many of the securities.

Less Exposure

``We have significantly reduced our exposures'' to the subprime mortgage market and CDOs, Molinaro said.

The world's largest banks and securities firms have reported at least $146 billion of writedowns and credit losses stemming from the ensuing credit-market contraction, according to Bloomberg data.

About 30 percent of Bear Stearns's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz. The company's $1.9 billion mortgage writedown wiped out revenue in the three months ended Nov. 30.

Adelson said he would pay more attention to Bear Stearns's strategy shift if it were coming from Berkshire Hathaway Inc. Chairman Warren Buffett.

``I think of Warren Buffett as a guy who's almost always right, and at this stage of the game I don't think of Bear that way,'' Adelson said.

[此贴子已经被作者于2008-2-10 1:38:45编辑过]

The world's banks ``remain at risk'' from as much as $203 billion in additional writedowns, largely because the bond insurance crisis may worsen, UBS AG said.

``Banks have made progress in credit-market related writedowns,'' London-based UBS analyst Philip Finch said in a note to investors today. ``But more are expected,'' he added.

Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That may rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. ``Risks are rising and spreading and liquidity conditions are still far from normal,'' the note said.

MBIA Inc. and Ambac Financial Group Inc. are struggling to maintain the AAA ratings on their bond insurance units because of losses on residential mortgages, exposing banks to possible writedowns on securities guaranteed by the insurers. So-called monoline insurers guarantee the repayment of bond principal and interest in the event of defaults.

Ambac was the first monoline insurer to ever be downgraded when Fitch Ratings cut it to AA from AAA in January, citing ``significant uncertainty'' over the insurer's business model.

The cost of protecting banks from default soared on concern a proposal to break up bond insurers MBIA and Ambac may trigger further credit market losses.

Bond Insurers

Credit-default swaps on the Markit iTraxx Financial index of 125 banks and financial institutions jumped 6 basis points to 103 at 4:49 p.m. in London, according to JPMorgan Chase & Co.

New York Insurance Department Superintendent Eric Dinallo said regulators are trying to help the two biggest bond insurers raise $15 billion to avert rating downgrades that may endanger the $1.2 trillion of debt they guarantee worldwide. One option is to split the insurers' municipal bond business from their money-losing subprime-mortgage units, Dinallo said in a Bloomberg Television interview yesterday.

A regulatory backlash against the banks also threatens to cut profits in the global banking industry by 5.3 percent this year, which could result in additional capital requirements for banks, according to Finch.

Increased credit costs of 10 basis points would lower 2008 industry earnings to 5.9 percent from 10 percent, the report said. A basis point is 0.01 percentage point.

More Writedowns

Goldman Sachs Group Inc., the biggest securities firm by market value, had its first-quarter profit estimate cut 51 percent today by Fox-Pitt Kelton Cochran Caronia Waller. The New York-based firm faces ``continued challenges in credit markets'' and may report a $1.7 billion writedown from leveraged loans, analyst David Trone wrote in a research note today.

UBS fell in Swiss trading today after Citigroup Inc. said Europe's biggest bank by assets may have to write down as much as 20 billion Swiss francs ($18.3 billion) this year on securities infected by the subprime debacle. UBS lost 3.8 percent, or 1.44 francs, to 36.02 francs.

HSBC Holdings Plc, Europe's largest lender, Bank of America Corp., the biggest U.S. bank by market value, and UniCredit SpA, Italy's largest bank by assets, would be included among a ``defensive portfolio,'' the UBS analyst recommended.

HSBC fell 2.3 percent to 730 pence in London trading. Bank of America fell 0.7 cent to $41.96 in New York and UniCredit declined 3.4 percent to 4.84 euros.

Rising defaults on subprime mortgages in the U.S. last year sparked a collapse of global credit markets. The ensuing cash shortage led to large writedowns by banks in the second half of 2007.