Bad News Hits Bear Stearns

The ratings agency says the bank's reputation has suffered from the problems at its hedge funds, and that those problems leave the firm open to costly lawsuits from investors. Bear didn't immediately return a call seeking comment.

But the issues are not just about some wayward funds. S&P says that "Bear Stearns has material exposure to holdings of mortgages and mortgage backed securities, the valuations of which remain under severe pressure."

Bear also could suffer under the weight of committed financing tied to underwriting leveraged buyouts, says S&P.

"We believe these direct balance sheet exposures are not proportionately larger than those of Bear Stearns' peers," write S&P analysts Diane Hinton, Scott Sprinzen and Tanya Azarchs. The analysts even say they expect Bear to be profitable in the current quarter.

S&P says the negative outlook means the ratings may be lowered if "large losses were to be incurred over the next few quarters or if earnings failed to stabilize at a satisfactory level beyond the next few quarters, which we expect will be -- at best -- difficult ones for the company."

The analysts highlight the risk that an "extended downturn" in the U.S. mortgage and leveraged finance sectors would be a particularly harsh blow to Bear, as it relies heavily on those areas for revenues and profitability.