Bear Stearns taking additional writedown

Investment bank Bear Stearns Cos. will take a $1.2 billion writedown in the fourth quarter related to weakness in its credit portfolios, and investor relief at the size of the writedown drove shares sharply higher Wednesday.

Chief Financial Officer Samuel Molinaro Jr. said the writedown will lead the company to post a loss during its fiscal fourth quarter, which ends Nov. 30.

Molinaro, presenting at the Merrill Lynch Banking and Finance Conference in New York, said Bear Stearns latest round of writedowns should "suffice" in accurately valuing products such as subprime mortgages and collateralized debt obligations. The $1.2 billion writedown is only an approximation as the quarter has yet to end, and is net of any hedging gains, Molinaro added.

Molinaro said tightening of the mortgage market will likely continue into 2008, as the conversion of pools of mortgages into bonds has essentially "come to a grinding halt."

Molinaro anticipates 2008 volume will decline further, and be even more focused on traditional, prime mortgages than it is today. He said Bear Stearns has cut about 600 of the 1,000 jobs at its lending unit since the peak of the market.

Deterioration in the market accelerated in July, when two Bear Stearns-managed hedge funds worth billions of dollars, and heavily invested in subprime mortgage securities, collapsed as defaults increased. That helped trigger the credit crisis that swept the markets this summer.

Bear Stearns has been "working hard" to reduce its exposure to the subprime mortgage and collateralized debt obligation markets, Molinaro said.

CDOs are complex financial instruments that combine slices of varying assets and debt. Many CDOs are backed by subprime mortgages — loans given to customers with poor credit history. As those mortgages have increasingly defaulted, banks are being forced to write down the value of bonds and CDOs backed by the loans.

As of Nov. 9, Bear Stearns had about $884 million in exposure to CDOs remaining on its books, and negligible exposure to subprime mortgages, Molinaro said.

Bear Stearns took about $850 million in writedowns during its fiscal third quarter, as banks took more than $40 billion in writedowns in the period. The fourth quarter is shaping up to be as bad or worse than the previous quarter, as banks already have announced billions more in writedowns.

Britain's HSBC Holdings PLC said Wednesday it would take a writedown of $3.4 billion for its exposure to the U.S. mortgage market.

Bear Stearns' writedowns have been relatively smaller than its investment banking competitors. Morgan Stanley said earlier this month it would take up to a $6 billion writedown in the fourth quarter related to its exposure to the beleaguered subprime mortgage market.

Goldman Sachs Group Inc., considered the best risk manager among investment banks, said earlier this week it would not have to take further writedowns on mortgage-related losses. It took about $2.4 billion in writedowns during the third quarter.

Merrill Lynch & Co.'s nearly $9 billion in third-quarter writedowns cost its chief executive his job. One analyst predicts Merrill Lynch could have to take an additional $10 billion in writedowns during the fourth quarter.

Bear Stearns shares rose $3.78, or 3.7 percent, to $104.65 in morning trading. Shares traded as high as $111.01 earlier in the session. Shares in investment banks have tended to rise in the past few months after disclosing writedowns, to the extent they are not larger than expectations.