Bear Stearns expects to write down $1.2 billion of assets linked to mortgages in the fourth quarter, but the worst of the bank's mortgage writedowns is over, Bear's chief financial officer said.
The writedown will result in a quarterly loss, CFO Sam Molinaro told a banking conference.
Investors were relieved the write-down was not bigger and sent Bear Stearns shares higher.
The news also helped boost the overall stock market and pushed bond prices lower.
"We have another firm out today with writedowns, and people are getting comfortable with the view that this second round of writedowns may be the beginning of the bottom," said Owen Fitzpatrick, head of U.S. Equity Group at Deutsche Bank Private Wealth Management.
Bear Stearns has reduced its exposure to subprime mortgage bonds and repackaged mortgage bonds known as collateralized debt obligations, Molinaro said.
Bear Stearns is now positioned to profit if subprime mortgage bonds weaken further, but still has $884 million of exposure to collateralized debt obligations.
"This has been an incredibly challenging period," Molinaro said.
Massachusetts Goes After Bear on Hedge Funds
Meanwhile, Massachusetts' top securities regulator filed a complaint Wednesday accusing Bear Stearns of improper trading in two in-house hedge funds that later collapsed because of wrong-way bets on risky mortgage holdings.
The administrative complaint was filed by the state's Secretary of the Commonwealth, William Galvin. A copy was posted on his office's Web site.
According to the complaint, Bear had conflicts of interest involving its various affiliated entities that led to improper trading at the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Enhanced Leverage Fund.
While Bear assured investors at one of the funds that proper disclosures were required when trading occurred between related parties, these controls "did not survive the daily ordeals of trading and managing and leveraging," the complaint contends.
The complaint said that "the result of this poor conflict management was that hundreds of transactions did not obtain the approvals required by federal law and promised in the offering documents."
Bear said in mid-July that the two hedge funds had very little value left. They both had invested in collateralized debt obligations -- bonds made up of repackaged mortgages -- which collapsed as homeowner defaults surged.
A Bear Stearns representative was not immediately available for comment.