Bear Stearns ( BSC) expects to take a $1.2 billion writedown related to its exposure to mortgage-related securities in the fourth quarter, but said its leveraged finance business is getting better. The writedowns are linked to the liquidation of Bear's warehouse of collateralized debt obligations and other subprime mortgages, whose prices have been crushed in the market over the past two months. However, Bear has cut its exposure to CDOs by more than half since the end of August, to $884 million, and its long position in domestic subprime mortgages has been eliminated. That apparently led investors to believe Bear has gotten a handle on the biggest of its problems, and they sent its shares up 6.1% to $107 in premarket trading. "
I don't want to predict that things couldn't get worse, because things keep surprising," Chief Financial Officer Sam Molinaro Jr. commented during an investor conference in New York sponsored by Merrill Lynch ( MER). "While hedges have worked reasonably well ... there are no perfect hedges. The perfect hedge is selling the assets." Molinaro said that the business of originating and selling mortgage securities had essentially coming to a "grinding halt," but he held out hope that the company's prime brokerage and global clearing business in the U.S. and internationally would excel. "We think that the business more broadly away from mortgages is very well poised in 2008," he said.
Bear Stearns' franchise in particular has been at the center of the credit crunch begun in earnest this summer when a pair of its hedge funds made highly leveraged bets on mortgage securities and CDOs that turned sour. The fallout from the hedge fund debacle sent the markets into a tailspin that's still being felt. Bear's chief financial offer said the firm has about $2 billion in mortgage-related exposure that it has significantly tried to reduced. Molinaro said he believes its remaining securities are "marked at levels we think that conservatively reflect conditions in the market." "It was certainly a rough summer from a reputational franchise," noted Molinaro. Bear is one of the weakest recent performers among the financials, second to Merrill Lynch, whose severe losses caused the ouster of Stanley O'Neal. Third-quarter net income for Bear was down 61% to $171.3 million, or $1.16 a share, from the year-earlier period, compared with $438 million for the same period last year. Bear already took a $200 million loss related to the Bear Stearns Asset Management High-Grade hedge funds. It also booked $700 million in writedowns related to mortgage assets and private equity loan commitments that lost value during the credit crunch.