Bear Stearns reported its first quarterly loss ever in its eight-decade history on Thursday, stung by the mortgage crisis that has swept markets across the globe.
That turmoil has afflicted firms as diverse as top Wall Street banks and small student-loan providers. And while reported losses have topped $40 billion so far, analysts say that figure could climb even higher.
Morgan Stanley, a larger rival of Bear Stearns, reported its own multibillion-dollar loss on Wednesday, one that forced it to sell a stake to a Chinese sovereign wealth fund. Firms like Merrill Lynch that have already reported losses are expected to announce more next month. Even Goldman Sachs, which reported a modest profit on Tuesday, has not been immune to a decline in its stock price amid fear that it could face pain next year, too.
Bear Stearns said it lost about $854 million, or $6.90 a share, for the fourth quarter, compared with a profit of $563 million, or $4 a share, in the period a year earlier. Analysts surveyed by Bloomberg News had expected a loss of $1.82 a share.
Bear Stearns also said it had written down $1.9 billion of its holdings in mortgages and mortgage-based securities, up from the $1.2 billion it had anticipated last month. As a result of its disastrous results, Bear Stearns said its management will not receive bonuses this year.
The news caps a disastrous year for the investment bank, one of the nation’s largest underwriters of mortgage bonds. Beginning this summer with the housing slowdown, Bear Stearns has stood as the prime example of how Wall Street’s big bet on securities based on risky home loans went south.
While many of its peers, including Merrill, Morgan Stanley and Citigroup, have announced far more in write-downs, Bear Stearns draws far more of its profit from its trading operations. That was reflected in its fixed income unit, which reported a net loss of $1.5 billion, down sharply from the $1.1 billion in profit the bank reported for the same time last year.
“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,” James E. Cayne, Bear Stearn’s chairman and chief executive, said in a statement.
The fate of Mr. Cayne, its longtime leader, has been the subject of much speculation on Wall Street since this summer. As two internal hedge funds that had bet on home mortgages began to crumble, questions about Mr. Cayne’s leadership arose. Reports that he had gone golfing during the worst parts of that crisis did not help.
The investment bank lost so much capital that Bear Stearns formed a partnership this fall with China’s Citic Securities, in which the two firms swapped shares. Though not as drastic as other firms’ measures to shore up capital — Morgan Stanley on Wednesday announced the sale of a $5 billion stake to China’s sovereign wealth fund, and both Citigroup and UBS made similar deals with Middle Eastern and Asian governments — it was a reflection of how weak Bear Stearns had become.
The firm has also suffered much internal turmoil. Mr. Cayne fired his heir apparent and the man who oversaw those bad bets, Warren J. Spector, leaving Bear Stearns with an uncertain future. Alan D. Schwartz, who was co-president alongside Mr. Spector, comes from the firm’s investment banking side and is less familiar with its core trading operations.
And those hedge funds are continuing to give the investment bank headaches. Ralph Cioffi, the man who managed the funds, left the firm last week amid reported investigations into whether he improperly withdrew money from those funds before they imploded.
Some of Bear Stearns’s businesses reported gains, but sometimes barely. Its equities trading operation reported net revenue of $381 million, an 11 percent drop from last year.
Its investment banking business, which constitutes a far smaller portion of the firm’s profits than at its larger rivals, reported $205 million in revenue, a 44 percent drop from last year. Even there, the bank felt pain from the debt markets, as lower fees from fixed-income underwriting cut into higher revenue from its financial advisory work.
The firm’s global clearing services reported revenue of $276 million, a modest 2 percent gain from the same time last year. Its wealth management business showed some of the same gains made across the industry, posting revenue of $272 million, or up 10 percent from last year.
Bear Stearns’s return on equity, a measure of how efficiently the firm is using its capital in its own trades, dropped to negative 29.1 percent, down steeply from 20.5 percent last year.
source: 20dec2007
NEW YORK — Bear Stearns Cos. posted the first quarterly loss in its 84-year history as it wrote down $1.9 billion of mortgage assets and its traders made bad bets on interest-rate products, equity options and currencies.
The smallest of Wall Street's five big investment banks recorded a net loss of $854 million, or $6.90 a share, in its fourth quarter that ended Nov. 30 compared with net income a year earlier of $563 million, or $4 a share. It booked a revenue loss of $379 million compared with a gain of $2.4 billion in the year-earlier fourth quarter.
Analysts surveyed by Thomson Financial had forecast on average a loss of $1.79 a share and net revenue of $625 million.
Shares of Bear Stearns were down about 1.2% or $1.04 at $89.53 in recent trading, after rising earlier on hopes that the company had put its dismal year behind it.
"The simple facts are we dealt with very difficult markets across the board, and we had weak trading results in addition to the mortgage write-downs," Chief Financial Officer Samuel Molinaro said in a conference call with analysts.
Bear Stearns was the first investment bank to signal the depths of the credit and mortgage crisis when two of its hedge funds stuffed with mortgage-backed securities collapsed last summer, raising concerns rose about its capital strength.
The company in the fourth quarter took $700 million more write-downs than it forecast six weeks ago, fueling hopes that its inventory is now written down to appropriate levels. But in a sign that investors may be waiting for distressed assets to fall further before taking them off bank balance sheets, Bear said its CDO exposure declined only to $750 million from $874 million in early November. At the end of August, Bear had $2.1 billion of CDOs.
The fourth-quarter write-down cut Bear Stearns' bottom line by $8.21 a share, but the firm also was battered by poor positioning in core interest-rate, foreign exchange and structured equity trading.
"Candidly, this has been a very difficult market to call," Mr. Molinaro said. "A handful of firms have done it well. Most haven't. We've clearly been wrong in the way we positioned the books."
For the year, net income plunged 89% to $223 million from $2.1 billion, leading the company's top executives to announce they will forego 2007 bonuses.
"This is as it should be," Bear Stearns Chairman and Chief Executive James E. Cayne said in a memo to employees that called the company "a meritocracy where people are rewarded for their success" and where they are held responsible for poor performance.
The quarterly loss dented Bear Stearns' capital, although Mr. Molinaro said the company is adequately capitalized and should return to stronger levels by midsummer after it completes a $1 billion convertible note sale to China's Citic Securities. He also said capital ratios should be helped by expected declines in assets since Bear is originating fewer residential mortgages and has cut back its business of financing mortgage companies.
Mr. Cayne told employees that his confidence in the company is "rock-solid."
Some analysts expressed concern about Bear's core business lines.
"The write-downs are less surprising and less disconcerting than what looks like a loss of franchise business," Credit Suisse analyst Susan Katzke wrote in note to clients. "Have we hit bottom? The loss of franchise/business poses the largest risk to return prospects."
Mr. Molinaro said 2007 was an extraordinary year that doesn't reflect the company's earnings power. Revenue should rise in 2008, although not to Bear Stearns' record 2006 levels because "fixed-income conditions will remain challenging for some time."
Revenue slipped from an already troubled third quarter not only in Bear Stearns' core fixed-income franchise — reflecting the writeoffs — but also in institutional equities, investment banking and global clearing services.
Capital markets — its biggest sector that includes sales and trading of fixed-income products and equities as well as investment banking — recorded a revenue deficit of $956 million, largely reflecting the mortgage write-downs. Year-earlier revenue in the area was a positive $1.91 billion. Bear Stearns is one of the biggest U.S. underwriters of mortgage bonds.
Equities revenue fell 11% to $384 million from a year ago and from $719 million in the third quarter, despite growth in the company's burgeoning international franchise. Bear Stearns has been slower than its Wall Street rivals to expand into Europe and Asia. In November, Bear Stearns announced its $1 billion cross-investment with Citic, saying it will help the firm develop its capital markets franchise throughout Asia.
Investment banking revenue in the fourth quarter dropped 44% from a year ago to $205 million and from $211 million in the third quarter, reflecting a dramatic decrease in bond underwriting assignments felt across Wall Street.
On Wednesday, Morgan Stanley reported its first quarterly loss in more than a decade as a pubic company after taking a $9.4 billion write-down on mortgage assets. Goldman Sachs Group and Lehman Brothers Holdings earlier reported positive though strained fourth-quarter results, tempered in part by fees from investment banking and asset management.
Mr. Molinaro said Bear Stearns' trading problems were "more or less in line with what we are seeing from others," but conceded that its businesses outside of capital markets are not big enough to significantly offset big losses.
Bear Stearns' clearing division, which includes prime brokerage for hedge funds, recorded a 17% dip in revenue from the third quarter to $276 million and was up 2% from a year earlier. Mr. Molinaro said hedge fund clients have shifted into less risky trades and conceded that some have shifted balances to rival brokers out of concern about Bear's well-publicized problems with its collapsed "high-grade" hedge funds last summer. Average margin debt and short balances — which reflect money Bear Stearns lends to clients to facilitate their trades, declined further in the fourth quarter after falling three months earlier.
Revenue from wealth management — which includes retail brokerage and asset management — jumped to $272 million from a third-quarter deficit as the asset management unit that includes the bankrupt hedge funds moved into the black following a $200 million hedge-fund related loss earlier in the year.
source: 20dec2007
As companies prepare or release their quarterly earnings statements, many are blaming the subprime meltdown, housing slowdown and credit crunch for weaker-than-expected results. Here's a selection of companies that have cautioned of an impact in recent months. This chart will be updated as more companies report. Updated 12/20/07
Company Type Date Comments
American International Group Financial 11/07/2007 AIG said that it saw a $2.45 billion after-tax drop in the value of investments in assets that are backed at least in part by subprime mortgages. AIG still held those assets as of the end of the quarter, so those losses were not reflected in the company's net income. Also, the company said it realized an actual loss of $149 million in its portfolio of mortgage-backed securities.
AutoNation Car seller 10/24/2007 "[C]hallenging economic environment" in the third quarter "for new vehicle sales driven largely by continued weakness in the housing market in our key markets of Florida and California." New vehicle unit sales for California and Florida declined 11%.
Bank of America Financial 11/13/2007 Plans a pretax write-down of about $3 billion in the fourth quarter to reflect a drop in value of securities related to mortgages. Also said it will spend $600 million supporting in-house money market funds that are exposed to troubled financing entities called structured investment vehicles. The bank also will suffer a $300 million impairment of the value of a mezzanine investment. Back in October, Chairman and CEO Kenneth D. Lewis said: "While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance." The company recorded $247 million in write-downs related to leveraged buyout loans, $607 million in trading losses and sharply higher credit-loss provisions.
Barclays Financial 11/15/2007 Bank booked credit, mortgage and leveraged finance related charges and write-downs worth £500 million in the third quarter. Barclays booked an additional £800 million in net charges and write-downs in October, reflecting "the impact of rating agency downgrades on a broad range of CDOs and the subsequent market downturn," the bank said.
Bear Stearns Financial 12/20/2007 Bear Stearns posted a net loss of $854 million on a higher-than-projected $1.9 billion in mortgage write-downs. Last month, Bear Stearns said it expects a write-down it estimated at about $1.2 billion after hedging and other offsetting gains. The losses relate to the company's heavy exposure to residential mortgages, mortgage securities and CDOs. In September, Bear said "significant reductions in both mortgage and credit-related revenues as volumes decreased while asset values declined" led to an 88% decline in quarterly fixed-income revenue to $117.6 million.
CarMax Car seller 09/19/2007 Cut its earnings estimate for fiscal 2008, blaming housing slump and subprime-mortgage crisis for slowing auto sales.
Centex Home builder 10/23/2007 "Market conditions were extremely challenging during the quarter, reflecting the serious disruptions in the credit and mortgage markets that occurred during that period," said Chairman and CEO Tim Eller in a prepared statement. "In response, we meaningfully reduced prices in order to improve affordability for our home buyers." The company recorded $983 million in impairments and other land charges.
Citigroup Financial 10/01/2007 "Dislocations in the mortgage-backed-securities and credit markets, and deterioration in the consumer-credit environment" will lead to 60% drop in third-quarter profit, company warns. Later, Citi posted a 57% slump in third-quarter net income, in line with its warning.
Countrywide Financial 10/26/2007 "[U]nprecedented disruptions" in the mortgage market and the national housing slump lead to a $1.2 billion third-quarter loss. Countrywide reserved $934 million for bad loans in the third quarter, up from $38 million held during the same quarter last year.
Credit Suisse Financial 11/01/2007 "The extreme market conditions ... affected many of our businesses. However, our global diversification and balanced business mix helped us mitigate the impact on our overall performance. ... We are seeing encouraging signs that activity in the credit markets is increasing." The company said its third-quarter net slipped 31%, as it wrote down 2.2 billion Swiss francs ($1.9 billion) for unsold leveraged loans and structured products such as mortgage securities.
Deutsche Bank Financial 10/03/2007 Plans a €700 million charge on leveraged loans and loan commitments in the third quarter, as well as a €1.5 billion charge on structured credit products, residential mortgage-backed securities and relative value trading in both credit and equities.
Deutsche Bank Financial 10/31/2007 "The third quarter of 2007 was a period of exceptional turbulence in financial markets," said Chairman Josef Ackermann. The company took charges €603 million on leveraged loans and loan commitments (net of related fees), and €1.56 billion on relative value trading in both debt and equity, structured credit products and residential mortgage-backed securities.
E*Trade Financial Financial 11/09/2007 The company said that the value of its holdings of securities backed by home mortgages had fallen significantly and will lead to bigger than expected write-downs in the fourth quarter. E*Trade didn't quantify the losses, but said they would keep it from meeting its earnings target and said it couldn't provide a new one. In addition, E*Trade said the SEC has opened an informal inquiry related to issues with its loan and securities portfolios.
FedEx Transportation 09/20/2007 Cut earnings estimate, blaming slowing economy; says "freight business has been impacted by the slowing economy, especially the housing market."
Freddie Mac Financial 11/20/2007 Reported a loss of $2 billion for the third quarter and said it is "seriously considering" a 50% cut in its fourth-quarter dividend. Also said it is considering ways to raise additional capital.
General Electric Financial 09/18/2007 Said it expects a hit of $300 million to $400 million related to its planned exit from the subprime market, third time in as many quarters that GE's results will be affected by subprime woes.
GMAC Financial Services Financial 11/01/2007 GMAC's ResCap unit posted an operating loss of $1.8 billion, which included a $455 million goodwill impairment charge. The unit saw a loss on sold mortgages of $569.6 million. GMAC expects "the challenges in the housing and mortgage markets will continue to prevail beyond the end of 2007."
Hershey Food 10/18/2007 The credit crunch hurt the the company’s confectionary business, said Chief Operating Officer David West. “A lot of our distributors work on fairly thin margins ... and a couple of points' increase in interest rates really eats into their margin [so] that they have got to make a choice about what inventory to carry and what not,” he said.
Home Depot Retailer 11/13/2007 "We are facing a tough environment as housing indicators continue to deteriorate," Chairman and Chief Executive Frank Black said. "Our financial performance in the third quarter reflects these tough conditions." The company reported a 27% decline in third-quarter net income and cut its fiscal-year earnings guidance.
HSBC Financial 11/14/2007 Took $3.4 billion third-quarter impairment charge for U.S. consumer-finance business, adding to $4.1 billion in charges over the first half. Also, HSBC Finance boosted its credit-loss reserves against bad mortgages to $3.4 billion, from $2.6 billion IndyMac Bancorp Financial 11/06/2007 "[D]eteriorating mortgage delinquencies and a declining housing market, combined with an unprecedented collapse in the secondary market for non-GSE loans and securities" led to loss for the quarter. Company reported $575 million, or $4.79 a share, in combined credit costs and spread widening charges.
International Business Machines Technology 10/16/2007 Disappointing hardware and software results largely reflect a falloff in sales of mainframes, the company said. Mainframes are mostly bought by big banks, and the company also saw deferrals of big software orders also tied to the financial-services industry.
J.P. Morgan Chase Financial 10/17/2007 "Our firm performed well overall in the third quarter, despite challenging credit and market conditions," said CEO Jamie Dimon. The company posted a 2.3% increase in quarterly net despite $1.3 billion in write-downs on leveraged loans and surging credit-loss provisions.
KB Home Home builder 09/27/2007 "Oversupply of unsold new and resale homes and downward pressure on new home values has worsened in many of our markets as tighter lending standards, low affordability and greater buyer caution suppress demand," said President and Chief Executive Jeffrey Mezger. Year-over-year revenue dropped 32% to $1.54 billion.
Lennar Home builder 09/25/2007 Swung to loss, cut 35% of work force. "Consumer confidence in housing has remained low, while the mortgage market has continued to redefine itself."
Levitt Home builder 10/11/2007 Levitt said it expects to take pretax charges of about $160 million to $170 million associated with impairment charges on homebuilding inventory at Levitt & Sons unit, and the write-off of its investment and loans made to Levitt & Sons.
Lowe's Retailer 11/19/2007 Lowe's CEO Niblock said "Many external factors contributed to the weak sales environment, including a continuing housing correction, drought conditions in several U.S. markets, and slower than expected sales in Gulf Coast markets." The company posted a 10% decrease in quarterly net and again lowered fiscal-year expectations. The results came after warning in late September that Expects earningsfor its fiscal year ending Feb. 1 at the low end of an earlier forecast of $1.97 to $2.01 a share; blames a weaker housing market than most predicted, a subprime credit situation that was deeper than most realized, and deflation in lumber and plywood.
Merrill Lynch Financial 10/24/2007 Took $7.9 billion in write-downs on collateralized debt obligations and subprime mortgages, greatly exceeding its earlier estimates. "We expect market conditions for subprime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions," the company said.
Morgan Stanley Financial 12/19/2007 Morgan Stanley swung to a fourth-quarter loss as the company took $9.4 billion in mortgage-related write-downs and announced a $5 billion investment from China's sovereign wealth fund. In November, Morgan Stanley said it will take a $3.7 billion write-down to reflect the drop in value of positions related to U.S. subprime mortgages over the past two months and said its remaining exposure comes to $6 billion. In September, it took a quartely loss of $940 million from the decreased market value of loans on its books as well as other financing commitments.
Nomura Financial 10/15/2007 Firm plans to close its New York-based residential mortgage-backed securities business Nomura said it would take a loss of $621 million on write-downs of residential mortgages and an additional charge of about $85 million for restructuring the business. "This is an extremely regrettable result," said Nobuyuki Koga, Nomura's president and chief executive officer.
Piper Jaffray Financial 10/17/2007 "The turmoil in the credit markets created very challenging capital markets conditions in the third quarter. While our business is not focused on the ... subprime mortgages and LBO loan commitments, the fallout from the turbulence in these markets negatively impacted nearly all of our businesses," said CEO Andrew S. Duff. Revenue dropped 20% from a year earlier.
Royal Bank of Scotland Financial 12/07/2007 RBS said it will book a total £1.25 billion write-down related to its own subprime exposure and that of ABN Amro, which it recently agreed to acquire.
Swiss Reinsurance Financial 11/19/2007 Said it accrued subprime-related losses of 981 million Swiss francs (about $875 million) in October.
UBS Financial 12/10/2007 UBS announced a further $10 billion in write-downs on subprime holdings in early December. In October it had said "deterioration in the U.S. subprime residential mortgage-backed securities market, especially in August, was more sudden and more severe than in recent history, and markets became illiquid. This led to substantial valuation losses, including in securities with high credit ratings." The Swiss giant said it plans to write down as much as 4 billion Swiss francs, or $3.41 billion, in assets, including securities tied to U.S. subprime mortgages.
Wachovia Financial 11/09/2007 Wachovia said the value of securities it owns that are backed by loans sank by about $1.1 billion in October. It also said it will record a loan-loss provision in the fourth quarter of between $500 million to $600 million, citing the housing-market downturn. In October, said "disruption in the fixed income markets in the third quarter ... clearly had a disappointing impact on the results of market-oriented businesses, but the strength in our core banking and brokerage businesses continued to serve us very well," said Chairman and CEO Ken Thompson. Third-quarter net income dropped 10% as loan-loss provisions quadrupled and the company recorded $1.3 billion in losses and write-downs.
Washington Mutual Financial 12/10/2007 "Unprecedented challenges in the mortgage and credit markets" mean the company now expects to record a fourth-quarter loss on a $1.6 billion goodwill write-down on the value of its home loans business. In October, it had said "weakening housing market and disruptions in the secondary market" will put third-quarter net 75% below the year-earlier level.
Wells Fargo Financial 10/16/2007 "Home equity produced higher losses, and will contribute to higher losses in the fourth quarter and probably into early 2008," said Howard Atkins, the bank's chief financial officer, in an interview. Wells Fargo's loan-loss provision surged 45% from a year earlier to $892 million, mainly due to problems with home-equity loans and auto loans.
Sources: WSJ.com research
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