Bear Stearns Cos., the No. 5 U.S. investment bank, said Thursday a bigger-than-expected writedown of its mortgage portfolio caused a substantial quarterly loss.

Bear Stearns stumbles to loss amid subprime mess

The Associated Press

NEW YORK — Bear Stearns Cos. said Thursday a bigger-than-expected writedown in its mortgage portfolio caused the fifth-largest U.S. investment bank to post the first loss in its 84-year history.

It took a $1.9-billion writedown in the quarter ended Nov. 30 as its mortgage-backed securities continued to lose value amid the global credit crisis. That was much larger than the $1.2-billion it expected in November.

Bear Stearns' fiscal fourth-quarter loss, and collapse of two hedge funds it managed during the summer, prompted chief executive officer Jimmy Cayne to pass on his 2007 bonus. Members of the company's executive committee also will not receive year-end bonuses.

“We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses,” he said in a statement.

Mr. Cayne is under pressure like other chief executives on Wall Street, as global banks have written off more than $100-billion in assets this year. Bear Stearns and other firms have seen writedowns from subprime-related investments and fixed-income trading come in much steeper than first expected.

The fiscal fourth-quarter loss after paying preferred dividends was $859-million, or $6.90 per share, compared to a profit of $558-million, or $4 per share, a year earlier. The company had negative net revenue of $379-million, compared to revenue of $2.41-billion a year earlier.

The results broadly missed Wall Street expectations, as analysts were unable to get a handle on exactly how exposed Bear Stearns was to risky subprime mortgage securities. Analysts polled by Thomson Financial had expected a loss of $1.79 per share on $625.1-million of revenue for the quarter. No analyst polled by Thomson expected a loss of more than $2.45 per share.

Bear Stearns has undergone three waves of layoffs since two hedge funds it controlled collapsed during the summer. Some 1,500 jobs have been eliminated from its staff of around 15,500.

The company, one of the biggest U.S. underwriters of mortgage-backed bonds, may be the Wall Street investment bank most directly exposed to this year's credit squeeze. It faces a number of legal actions related to the funds' collapse, including a suit filed this week by investor Barclays PLC.

Bear Stearns said fixed-income net revenue was negative $1.5-billion in the fourth quarter. However, it did not disclose how much was actually lost before being offset by hedging activity.

Sam Molinaro, the company's chief financial officer, said the investment house holds $43.6-billion of mortgage and other asset-backed securities — down 5 per cent from the end of November. The bank has about $500-million exposed to subprime mortgage loans originated in 2007 and about $750-million to collateralized debt obligations.

“We dealt with very challenging market environment across the board, and there was weak trading across a number of different businesses including the mortgage writedowns,” he told analysts on a conference call. “Our other fee-based businesses were not enough to offset” the mortgage losses.

Bear Stearns reported fourth-quarter revenue from equity sales and trading dropped 11 per cent to $384-million. Meanwhile, investment banking fees — an area Mr. Cayne hoped to build on — fell 44 per cent to $205-million.

“The results, to us, seem to imply that the problems at Bear are not contained to mortgages and more broad based than seen elsewhere,” Deutsche Bank Securities analyst Mike Mayo said in a note to clients.

With this quarter's sluggish performance, and an $850-million writedown during the third quarter, Bear Stearns reported a steep decline in full-year results. Profit in 2007 fell 90 per cent from the year-ago period to $212-million.

The dismal year for Bear Stearns might put more heat on Mr. Cayne, 73, to announce succession plans. Citigroup Inc. CEO Charles Prince and Merrill Lynch & Co. CEO Stan O'Neal were both ousted after their companies posted massive subprime writedowns.

Mr. Cayne ousted his co-president, Warren Spector, after Bear Stearns closed the two troubled hedge funds. Mr. Spector was considered to be an heir-apparent at the company.

But, Mr. Molinaro said that relations between senior executives and the board are “very solid and very good.”

The results capped a week of reports from four of the leading investment banks. On Wednesday, Morgan Stanley Inc. reported a $9.4-billion writedown from bad bets on mortgage debt — almost triple what it originally expected. That triggered its first loss as a public company for the second-largest U.S. investment bank.

It also unveiled a $5-billion investment from China's state-run investment vehicle. Like Mr. Cayne, Morgan Stanley's John Mack will pass up a bonus that topped $40-million last year. It was not clear how much smaller, if at all, either man's bonus would have been this year.