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Bear Stearns Shares Fall on Liquidity Speculation (Update4)
March 10 (Bloomberg) -- Bear Stearns Cos. fell 9.3 percent in New York trading, the most since 1998, on speculation the company lacks sufficient access to capital.
Bear Stearns, the second-biggest underwriter of mortgage- backed bonds, declined $6.52 to $63.56 in composite trading on the New York Stock Exchange at 1:55 p.m., the lowest level since March 2003. The shares pared earlier losses of as much as 14 percent after Bear Stearns said the speculation had no basis.
``There's an insolvency rumor and concerns on liquidity, that they just have no cash,'' said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York. ``There's been rumors of this for the past week or two.''
Bear Stearns led Wall Street shares lower in the past six months as the world's largest banks and securities firms wrote down $188 billion of assets linked to the subprime mortgage market. The company's fourth-quarter loss of $854 million was its first, and analysts in the past month have lowered expectations for earnings in the first quarter.
``There is no truth to the liquidity rumors,'' Russell Sherman, a spokesman for New York-based Bear Stearns, said in an interview. Alan ``Ace'' Greenberg, the former Bear Stearns chief executive officer and current board member, told CNBC that liquidity rumors are ``totally ridiculous.''
In December, Chief Financial Officer Sam Molinaro said the firm's liquidity was ``strong.'' During the fourth quarter, Bear Stearns reduced its reliance on short-term commercial paper and increased secured term funding, Molinaro said.
The firm is able to meet all its ``unsecured debt maturities over the next 12 months without issuing additional unsecured debt or liquidating assets,'' Molinaro said at the time.
Bear Stearns's so-called liquidity pool, consisting of ``high quality'' money market instruments, stood at $17.4 billion at the end of November, according to Molinaro. ``Readily available secured and unsecured committed bank lines'' were $8 billion.
Sanford C. Bernstein & Co. today advised investors against buying Bear Stearns and three of its rivals until the credit market stabilizes.
More writedowns are likely for these companies as ``financial leveraging that had benefited the group'' since 2004 ``continues to unravel,'' Bernstein analysts including Brad Hintz wrote in a report.
Credit default swaps on Bear Stearns, used to protect corporate bonds from default, jumped 246 basis points to 792, according to prices for one-year contracts from CMA Datavision.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.
``If liquidity is the elixir of life for any Wall Street firm, the current market certainly has the potential to be lethal,'' Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, wrote in a report. ``Which firms are most at risk? We would focus on any broker/dealer that has a narrowly defined critical business impact -- such as being `just' or primarily a mortgage-backed securities shop.''
Bear Stearns was the second-largest underwriter of mortgage bonds last year behind Lehman Brothers Holdings Inc. About 30 percent of the firm's fixed-income revenue came from mortgages and related securities before those markets froze, according to estimates from Bernstein's Hintz.
Moody's Investors Service downgraded 163 portions of 15 mortgage bonds underwritten by Bear Stearns today, and said 78 of those may be cut further. Wall Street firms sell most such bonds to their clients, though they have written down the value of some tranches remaining on their books.
Two Bear Stearns funds invested in subprime securities collapsed in July, wiping out $1.6 billion of investors' money. While Bear Stearns had less than $40 million of its own money in the funds, it was forced to bail one of them out. Most of its $1.9 billion writedown from subprime assets in the fourth-quarter was due to the securities seized from that fund.
Options traders increased their bets today that Bear Stearns shares will continue to fall. Put-option volume rose to 124,446 contracts, six times the 20-day average. Bearish bets outnumbered bullish ones, or calls, by about 2.5-to-1.
The price of today's most-active contracts, which give the right to sell the stock at $60 before this month's options expire at the end of next week, more than tripled to $3.90. April $55 puts, the fourth-most active, more than doubled to $4.60. For those wagers to pay off, the shares must drop 15 percent in the next six weeks.
Implied volatility, the key factor in determining the value of option contracts, rose to 98.40 after earlier surging to a record 111.33. An increase indicates traders anticipate bigger stock-price swings.
Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell.
To contact the reporters on this story: Jeff Kearns in New York at firstname.lastname@example.org; Yalman Onaran in New York at email@example.com. Last Updated: March 10, 2008 14:07 EDT