Cayne bows out of Bear Stearns

Bear Stearns’ reputation as a powerhouse among fixed-income dealers has been badly bruised as the value of its collateralised debt obligation and mortgage-backed securities (MBS) with subprime exposure has continued to tumble.

On November 30, the firm reported its first quarterly loss in the firm’s history, writing down $1.9 billion – $600 million more than it expected at the beginning of the month. In July, the firm shut the doors of two internal hedge funds – Bear Stearns Asset Management’s High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund – which at one point controlled over $900 million in aggregate assets under management. This occurred despite a $1.6 billion cash injection in June.

The price of Bear Stearns shares dropped after Cayne’s removal was first reported in the Wall Street Journal, with mid-day, intra-day composite trading at $75.08, down from the closing price of $76.25 the previous day. On January 3, 2006, the firm's shares traded at $161.39.

Brad Hintz, a New York-based senior analyst at Bernstein Research, believes the change in guard will not shield the firm from challenges. “The bond market has changed - unlike other fixed-income cycles, a booming MBS recovery is unlikely to occur in 2008-2009,” he said. “The expected decline in 2008 MBS, combined with the shift of the mortgage market away from higher-margin non-conforming and toward low-margin agency MBS, makes the outlook for Bear Stearn's 2008 fixed-income earnings challenging.”

See also: Write-downs mount in run-up to Christmas
Bear Stearns slashes 650 jobs
Bear profits tumble by 61% as Goldman's rise 79%