Bear Stearns Slumps

Shares sink after a second-quarter profit shortfall.
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Bear Stearns (BSC) sank Thursday after the meltdown in the subprime mortgage business took a chunk out of the brokerage firm's results.

In the second quarter, the New York company made $362 million, or $2.52 a share, down from the year-ago $539 million, or $3.72 a share. Net revenue, which excludes interest expense, was nearly flat at $2.5 billion.

Operating earnings, excluding certain costs, were $3.40 a share. Analysts were expecting the firm to make $3.50 a share on $2.3 billion of net revenue.

Bear said revenue at its principal trading business slumped 18% to $1.2 billion. The firm's capital markets business fell 10% to $1.9 billion.

Bear said revenue in its institutional equities business fell 3% to $543 million. The second quarter of 2006 included gains from the IPO of the

New York Stock Exchange

, Bear said.

Bears Stearns' fixed-income unit dropped 21% from a year earlier to $962 million. Bear said that mortgage-related revenue "reflected both industry wide declines in residential mortgage origination and securitization volumes and challenging market conditions in the subprime and Alt-A mortgage spaces."

Of the largest Wall Street firms, Bear Stearns is the most exposed to the mortgage market.

Dozens of lenders to homebuyers with poor credit histories have gone out of business in the last year, due to a spike in delinquencies and defaults on recent loans.

Bear was not the only brokerage firm hit by the subprime shakeout. On Tuesday,

Lehman Bros.


despite posting a 27% profit in the second quarter, also took a hit in its bond operations from the effects of the subprime shakeout.

Bear has been facing other headwinds. Last month, the New York brokerage firm said it was acquiring the remaining stake of its Bear Wagner Specialists unit. Bear took a $227 million writedown that reduced second-quarter earnings by 88 cents a share on the specialist business.

The company said last month that the

New York Stock Exchange's


move to electronic trading was squeezing profit margins in the specialist business.

But there were some bright spots in Bears Stearns' earnings.

Investment-banking revenue rose 28% to $356.8 million, while revenue from the company's wealth management business more than doubled from a year earlier to $341.3 million.

"The diversity of our franchise is clearly demonstrated in the record net revenues generated this quarter," said CEO James E. Cayne. "The global clearing services and wealth management segments reported record performance while results were also very strong from debt and equity underwriting, equity derivatives and leveraged finance. Internationally, we continue to grow aggressively, hiring talented people, broadening our product platform and reaching new clients in multiple geographies."

Shares fell $3.34, or 2.2%, to $146.15 early Thursday.

To watch Laurie Kulikowski's video take of this column, click here