Bad News Hits Bear Stearns

Stock quotes in this article: BSC , LEH , MS , GS , MER  

S&P kept Bear's credit rating at A-plus, but the outlook change means there is a greater chance of a downgrade over the next two years. A downgrade could hit the firm hard, coming on the heels of this summer's blowup of two hedge funds that made big bets on the hard-hit market for securities tied to subprime mortgages. A third fund has stopped permitting investor redemptions.

The ratings agency says Bear's "liquidity is strong," despite challenges tied to the collapse of the subprime lending business. But S&P says its revised outlook "reflects our concerns about recent developments and their potential to hurt Bear Stearns' performance for an extended period."

S&P says Bear's "relatively small capital base, high degree of operating risk, and concentrations in fixed-income products and in the U.S. market partially offset" strengths such as competitive advantages in underwriting mortgage backed securities, commercial mortgage backed securities, asset backed and CDO/CLOs.

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