August 5th, 2007

Wall Street Journal: Bear to “Oust” President Warren Spector

From The Wall Street Journal

Remodeling Job
Market Swoons As Bear Stearns Bolsters Finances
Brokerage Raises Cash, Cuts Short-Term Debt;
Spector Expected to Exit


August 4, 2007Bear Stearns Cos., a Wall Street trading titan that recently suffered the collapse of two mortgage-bond funds, took extraordinary measures to bolster its financial position amid investor fears that knocked down its shares and fed a broad stock-market swoon.

The big securities firm also plans to oust Warren Spector, Bear’s powerful chief of stock and bond trading and one of the firm’s two presidents, according to a person familiar with the matter. Mr. Spector, 49 years old, had been widely viewed as a leading candidate to become the firm’s next chief executive. Bear’s board is set to meet Monday to discuss Mr. Spector’s departure, the person said.

A spokesman for the firm declined to comment.

In addition to detailing the steps it has been taking to raise cash, Bear said it has reduced its reliance on short-term loans so it isn’t vulnerable to being shut off from the day-to-day loans required to fund its trading operations. Wall Street firms are especially vulnerable to crises of confidence, because they depend on lenders to finance their day-to-day securities trading and other operations.During a call with investors held early Friday afternoon, Bear’s senior executives attempted to quell investor fears, saying the firm is working to offset further drops in the credit markets, which have been roiled in recent weeks.

Besides turning to loans with longer maturities, it hedged existing positions that looked risky, such as securities based on pools of so-called subprime mortgages — loans made to borrowers with weak credit.

Bear said it reduced its short-term unsecured debt known as commercial paper to $11.5 billion from $23 billion in January. Treasurer Robert Upton said the company has unused committed secured bank lines that are “of over $11.2 billion, $4 billion of which is available to be drawn on an unsecured basis.”

Over the past eight months, it has raised more than $11 billion of cash. Mr. Upton also said the firm has “unencumbered collateral” — or assets not underpinning loans — exceeding $18 billion.

“We’re facing an extremely challenging market environment,” James E. Cayne, Bear’s 73-year-old chairman and chief executive, said.

After 22 years in the securities business, “this is about as bad as I’ve seen it in the fixed-income market,” Bear’s finance chief, Samuel Molinaro, said during the call. Fixed-income securities generally refer to bonds and other interest-bearing securities.

The firm is in a delicate position: It needs to demonstrate to the market that it has a strong, liquid balance sheet without suggesting it is seriously weakened or taking desperate measures to strengthen its balance sheet.

Rather than soothe frayed nerves, however, the somber comments exacerbated the market drop, with Bear stock and the Dow industrials — which had been off about 50 points before the conference call — falling further.”They called it the worst fixed-income markets in 20 years, grouping it with 1987 and the bursting of the Internet bubble, and said they needed a better August just to get to the lower end of their historical range of returns,” said Mike Mayo, an analyst at Deutsche Bank AG.

Bear, which employs 13,566 people, has seen its stock-market value shrink by more than one-third during 2007, bringing its total market value to about $12.5 billion — a relatively small figure for such an institution. Some analysts have suggested the firm could be takeover bait — a notion that Bear executives have rejected.

The Dow Jones Industrial Average, which was in the red for most of the day, started to sink further after Bear’s announcement. The index ended the session down 281.42 points, or more than 2%, at 13181.91. Although the Dow is still up 5.8% this year, it has fallen nearly 6% from its record close of 14000.41 on July 19. The Standard & Poor’s 500-stock index fell 2.7% Friday, while the tech-heavy Nasdaq slid 2.5%. (See related article.)

As U.S. housing prices have weakened and many subprime loans have fallen into default this year, the stock of firms like Bear and Lehman Brothers Holdings Inc., which play heavily in the origination, trading and packaging of mortgages, have taken a beating. More recently, the dry-up in leveraged financing, which until recently was fueling the most euphoric buyout boom in history, has thrown a wrench into the brokerage firms’ bond underwriting and advisory businesses, which could crimp earnings even more.

Concerns about Bear hit financial stocks particularly hard, amid mounting concern that banks are carrying more risk for mortgages and other loans now that investors have lost their appetite to buy securities backed by such debt. Lehman was downgraded by a securities analyst on Monday after it disclosed it has $43 billion of contingent commitments to finance debt-backed acquisitions by buyout firms and others, up from $13 billion six months earlier.

Lehman stock was hit particularly hard Friday, falling nearly 8%, or $4.67, to $55.78. Lehman says such commitments may be hedged or repriced to reflect market conditions. What that means is that Lehman might make offsetting trades or mark down the value of the positions if the market further deteriorates.

The market moves yesterday highlight just how jittery investors have become about the welfare of Wall Street’s biggest firms, which depend on a combination of goodwill and short-term financing to stay in business.

“Everybody’s waiting for the second, third and twentieth shoe to drop,” said Mike Vogelzang, president of the money-management firm Boston Advisors.

During morning trading, Bear shares fell nearly 8% to $106.55, a new 12-month low. At that price, Bear stock was trading below 1.2 times its book value, or the difference between its assets and liabilities-the lowest of any major Wall Street firm.

The cost of credit protection — or the amount investors bet against the chances that a company will default on its credit obligations — for Bear is more than seven times higher than what it was at the start of the year. “The financial system relies on confidence, and investor confidence has been shaken in recent weeks,” said Tim Compan, a corporate-bond portfolio manager at Cleveland-based Allegiant Asset Management, with $10 billion of fixed-income assets under management.

The downdraft started early in the day when ratings agency Standard & Poor’s cut its outlook on Bear Stearns from stable to negative, saying its “reputation has suffered from the widely publicized problems of its managed hedge funds, leaving the company a potential target of litigation from investors who have suffered substantial losses.”

The stock started to recover when Bear put out a statement saying the 84-year-old institution was “profitable and healthy and our balance sheet is strong and liquid.”

Bear, traditionally a bond powerhouse specializing in mortgages, has been among the Wall Street firms most exposed to the turmoil and illiquidity afflicting the markets for mortgage and asset-backed bonds.

Already, the portfolio manager who ran the two high-grade hedge funds and the executive who had run Bear’s asset management division have been sidelined after an embarrassing meltdown that cost investors as much as $1.6 billion and led to a bankruptcy filing.

Based on a relatively bullish bet on certain mortgage-related securities and an enormous amount of borrowed capital, the High-Grade Structured Credit Strategies Fund and a more leveraged sister fund performed well until late this spring, when the prices of those securities precipitously dropped. After poor returns spurred a slew of investor requests for their money back, the two High-Grade funds were faced with lender demands for additional cash and collateral that couldn’t be met, ultimately forcing their closure.

Mr. Spector wasn’t on yesterday’s conference call. He has spent his entire career at Bear. Armed with little other than a business degree and a sharp intellect, he started at the firm in 1983 and quickly established his reputation for savvy mortgage-bond trading. Even in his late 20s, he was making such big bonuses that he caught the attention of Mr. Cayne, who had not yet become chief executive, and established a close rapport.

At 30, about two years after being named a senior managing director, Mr. Spector was given a board seat at the firm. Then a few years later, he was named co-head of fixed income, Bear’s most important business unit.

In recent years, Mr. Spector, an established bridge player and golfer with homes in Manhattan’s Greenwich Village section and on Martha’s Vineyard, has overseen Bear’s entire capital markets business — a plum but demanding job that includes monitoring stock and bond trading.

The recent downturn in its bond business, notably in mortgage-backed securities, is a rare weak spot for Bear, a firm known for its quick-witted trading and risk management as well as its expertise in the world of home loans. And while Bear’s chief financial officer, Mr. Molinaro, took note of gains in the equity and international businesses that will help to offset the revenue downturn in mortgage securities, the firm’s business mix is weaker than that of peers such as Lehman, which has a robust investment-banking division as well as a huge mortgage unit.

At the right price, Bear would be an attractive candidate for a range of potential acquirers. But it has a history of resisting overtures even when times are good and is seen as unlikely to sell at a discount. Bear has extensive trading operations, as well as a prime brokerage serving hedge funds and processing their trades. The company also runs an investment bank that puts together mergers and acquisitions and corporate bond deals.

That mix of capabilities could prove desirable to a large commercial bank looking to expand ways to deploy its capital. That could include the likes of Swiss giant UBS AG, or even U.S. banks such as Wachovia or Bank of America.