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Size of loss for Bear Stearns jolts the firm

The surprisingly bad quarterly result torpedoes bonuses for top executives.

December 21, 2007|From Times Wire Services

Bear Stearns Cos. posted a much bigger-than-expected quarterly loss Thursday, the first net loss in the Wall Street firm's history, capping a fiscal year in which the investment bank took a beating on bad bets on sub-prime mortgages.

The company's top executives will get no year-end bonuses in the wake of the "unacceptable results," Chief Executive James "Jimmy" Cayne said in a statement.

Moody's Investors Service on Thursday downgraded Bear Stearns' long-term credit rating one notch to A2, the sixth-highest level, citing the investment bank's weak operational performance and a challenging outlook for 2008.

Bear Stearns, the fifth-largest investment bank in the U.S., said it took a $1.9-billion write-down in its fiscal fourth quarter, which ended Nov. 30, reflecting the reduced value of securities tied to sub-prime home loans. That was bigger than the $1.2 billion the company estimated in early November.

The net loss of $854 million, or $6.90 a share, compared with a year-earlier profit of $563 million, or $4 a share. The per-share loss was nearly quadruple the $1.80 that analysts on average had expected.

Bear's sub-prime mortgage problems may be largely over, but there is doubt that the company is diversified enough to recover as quickly as its rivals, Goldman Sachs analyst William Tanona said.

Bear Stearns shares fell Thursday after the earnings were released but rallied late in the day as the broader market rose. The stock closed up 82 cents at $91.42. It is down 44% this year, compared with a 16% decline for the Amex Securities Broker Dealer Index.

Bear Stearns helped spur the credit crunch that began last summer when two of its hedge funds, which invested in securities tied to the mortgages, collapsed in July.

The firm closed the funds and Cayne ousted his co-president, Warren Spector, who had been viewed as the chief executive's heir apparent.

"They need to find leadership and more financing from the outside," said Andrew Corn, CEO of New York-based investment firm Clear Asset Management, which sold its Bear Stearns shares in September. "The board will come under pressure to replace Cayne. The firm's reputation is tarnished and they're losing clients."

By slicing its bonus pool for fiscal 2007, Bear Stearns made its employees the worst-paid on Wall Street among the four investment banks whose fiscal year ends in November.

For the fiscal year, Bear Stearns paid total compensation of $241,998 per employee, down 24% from the year before and about a third of the average pay at rival Goldman Sachs Group Inc., which had the highest per-share compensation on Wall Street.

Bank of America analyst Michael Hecht said Bear's smaller bonus pool could lead to attrition and hinder a strong rebound for the investment bank.

Last year, Bear's top four executives received cash and restricted stock then valued at about $103 million. Cayne's total pay package was nearly $34 million.

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