Bad News Hits Bear Stearns

Updated from 12:26 p.m.

Brokerage stocks were dropping sharply again Friday as Bear Stearns (BSC Quote) tried to reassure investors of its "abundant liquidity."

Bear Stearns shares fell as much as 7% early Friday after Standard & Poor's cut the outlook on Bear's credit rating to negative from stable. Bear and other brokerage stocks then bounced back at midday after Bear issued a chest-thumping press release questioning the thinking behind the ratings move.

But all the shares swooned again at midafternoon as Bear finance chief Sam Molinaro told listeners on the call that the credit market is "about as bad as I've seen it in 22 years." He said revenue during July was "under significant pressure" and indicated the firm so far is seeing the same in August.

He and other execs emphasized the firm has been seeing "substantial benefits from hedging" its exposure to subprime loans and leveraged corporate loans. But while Molinaro said the firm was profitable in June and July, he cautioned that given highly stressed market conditions, it is "reasonable to assume that June was a hell of a lot better than July."

Shares bounced off their lows at midday before later giving back some of those gains. After earlier trading down as much as $9 a share at a 52-week low of $106.55, Bear Stearns was off $6.75 at midafternoon to $108.90.

The news comes as big brokerage firms and banks have come under severe pressure with a sharp turn this summer in the capital markets. After Wall Street rose a debt financing boom to record profits in recent years, the credit markets have seized up in the wake of the subprime mortgage mess. As a result, investors worry that the firms will be stuck holding billions of dollars in bad loans.

At midafternoon Friday, Lehman Brothers (LEH Quote) was down 7% and Merrill Lynch (MER Quote), Morgan Stanley (MS Quote) and Goldman Sachs (GS Quote) were each down 3%-4%.

Bear Stearns said in a midday press statement that it is "disappointed with S&P's decision" and called the ratings agency's questions about hedge fund problems at Bear Stearns Asset Management "unwarranted, as these were isolated incidences and are by no means an indication of broader issues at Bear Stearns."

The New York firm said its "balance sheet, capital base and liquidity profile have never been stronger." Bear said its "risk exposures to high profile sectors are moderate and well-controlled."

"S&P's action highlights the concerns in the marketplace over the recent instability in the fixed income environment," said CEO James E. Cayne. "Contrary to rumors in the marketplace, our franchise is profitable and healthy and our balance sheet is strong and liquid. Bear Stearns has thrived throughout both tumultuous and fortuitous markets for the past 84 years. We are experiencing another market cycle and we are confident in Bear Stearns' ability to succeed in this environment as it has in so many others."