Bear Needs a Cavemate

Bear Stearns (BSC) may need a deep-pocketed partner to set things right.

The Wall Street financial institution has been cratered by hedge-fund missteps and steep declines in its mortgage-related fixed-income operations. Just how dire the situation is was laid bare by Thursday's weaker-than-expected earnings report.

The bleak state of affairs at Bear may be too heavy for the bank to handle alone. That means Bear may need a new partner who can provide funds to stabilize its balance sheet and offer much-needed geographic diversity, says Punk Ziegel analyst Dick Bove.

The New York-based investment shop painted an abysmal picture in its third-quarter profit report. Earnings plunged 61% from a year ago as Bear, the poster child for the subprime mess, was ravaged by $200 million in hedge fund-related losses.

The bank's bad bets on subprime mortgages came in stark contrast to peer bank Goldman Sachs(GS), which surpassed analyst expectations in posting earnings of $2.85 billion, or $6.13 a share, for the quarter ended Aug. 31, up from the year-ago $1.59 billion, or $3.26 a share.

Rumors of a possible foreign partner taking as much as a 20% stake in Bear have been floating since last year. That talk has re-emerged as the bank's stock has tanked amid the credit crisis. Now Bove says an outside investor might be a key element to a possible recovery at Bear.

Earlier this month, it was revealed that billionaire investor Joe Lewis had obtained a passive 7% stake in the bank for $860 million. But the role of a new partner at Bear would mean an investor capable of providing the investment bank greater access to capital, helping it to leverage its services on a more global scale.

But even should a new partner willing to open up its purse and clients' book appear, Bear has an equally significant problem to address: its image.

CFO Samuel Molinaro has said that the worst of the bank's troubles are over. But the issues that have lashed the firm, and to a lesser extent other banks and brokers, aren't purely about economic losses. They are tied more to saving face and regaining reputational currency.

Evidence of how tarnished Bear's image is can be found in its prime brokerage business. During the bank's Thursday earning's call, Molinaro admitted that Bear had seen client departures at its prime brokerage business but hoped to lure business back.

Doing so, however, may take more than just fresh cash.

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