Bear buyout countdown

Shares in The Bear Stearns Cos. tumbled 15% this morning amid growing fears that the investment bank, the smallest of Wall Street’s big five, doesn’t have enough capital to survive its own mistakes, and the deepening credit crisis, according to Crain’s New York Business.
Though chief executive Alan Schwartz has insisted the firm has ample cash, Bear’s stock has fallen by 27% in the past week and analysts have begun to question whether this fiercely independent company’s days as a standalone are numbered. Bear would likely fetch about $9 billion in a sale, though the price is falling fast.
“Bear is probably going to be forced to find a merger partner,” says Punk Ziegel & Co. analyst Dick Bove. “But at this point, in the state it’s in, no one wants it.”
Bear’s problem is that it generates most of its business for selling and trading bonds at a time when investors are shunning all the safest forms of government debt. Its mortgage-backed business has evaporated and investors are worried that the firm may be exposed to large losses since it is a major broker to big hedge funds.
The company reported an $854 million loss — its first ever — in the fourth quarter, and investors are saying it will report similarly punishing first-quarter results next week.
Bear has less than $12 billion of capital, yet its balance sheet contains $395 billion of assets, meaning the firm is leveraged to the tune of 33 times over equity.
The relatively small capital base means Bear has less capacity to absorb the sort of mortgage-related hits taken at other Wall Street firms.
Investors fear that in recent weeks Bear’s balance sheet has been eroded even further as the firm has taken back on its books hard-to-sell assets that had been collateral for loans to now free-falling hedge funds.
Like Carlyle Capital, the bond fund affiliated with private-equity firm Carlyle Group, Bear is being particularly hard hit by margin calls from banks that are nervous about declines in the value of its residential-mortgage-backed securities.
However, Carlyle, a British-based firm with New York executives that trades in Amsterdam, was unable to find a middle ground in negotiations with its lenders late Wednesday, and is now on the verge of collapse after failing to agree a new financing deal with lenders.
All this has investors questioning whether 85-year-old Bear can survive.
The price insuring Bear debt against default has more than doubled in the past two weeks.

Related Topics: Bear Stearns Cos.