Why Barclays Needs Bear Stearns

Could a deal with Barclays (BCS Quote) be the tonic for Bear Stearns (BSC Quote)?

Both firms have had a rough go of it lately. Last week, London-based Barclays lost its $89 billion bid for ABN AMRO(ABN Quote) when bidders led by Royal Bank of Scotland won shareholder approval to purchase the Dutch bank.

For its part, Bear Stearns is trying to recover from an embarrassing summer that saw two of its hedge funds collapse under the weight of wrong-way bets on subprime mortgage-backed securities. The firm reported last month that its earnings plunged 61% from a year ago.

It's widely assumed that Bear would love to line up a deep-pocketed partner, if not an outright buyer. Meanwhile, Barclays must be looking to bounce back from its failed play for ABN. So Bear's misery could spell opportunity for Barclays.

"It would be a perfect match," says Richard Bove, banking analyst at Punk Ziegel. "Bear Stearns could use what Barclays brings to Bear."

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Several weeks ago, Bear's shares went on a tear on speculation in The New York Times that the firms was in talks with Warren Buffett and some financial institutions in China about a possible investment. While those rumors were soon dispelled, the market action underscored the fact that Bear investors are keen on the notion of the New York-based bank getting a helping hand.

At a conference Thursday, Bear CEO James Cayne said the firm isn't searching for an outside investor. But he did say Bear would be willing to talk. The critical component of such a matchup, Cayne said, was teaming up with someone that provided a better geographic platform.

That's where Barclays' chief John Varley could enter the scene.