Bear Stearns' Greenberg: Liquidity Talk Is 'Ridiculous'
Bear Stearns' Alan "Ace" Greenberg, a former chief executive who currently serves as chair of its executive committee, told CNBC that the liquidity rumors surrounding the company are "totally ridiculous."
"It's ridiculous, totally ridiculous," he told CNBC.
Greenberg's comments came after Bear Stearns shares had fallen more than 11 percent to their lowest the lowest in five years. Bear Stearns shares, which have since regained some lost ground, have shed nearly 30 percent since the end of January.
However, Greenberg's comments did little to calm option traders' nerves, according to Rebecca Engmann Darst of Interactive Brokers. According to Darst, there has been a steep rise in the implied volatility of Bear Stearns options, a sign that option traders anticipate a change in the price of Bear Stearns stock.
The implied volatility of Bear Stearns' at-the-money 60 call is now reading 107 percent, compared with its historic volatility on all Bear Stearns options at about 54 percent, Darst said.
Investors also were actively buying puts, which are the right to sell a stock at a certain time for a set price.
"Of interest here is not just the giddy level of put trading, with buyers and sellers eagerly swapping downside bets on Bear Stearns’ fortunes, but the lowering limbo-stick of trading interest," Darst said. "Puts at strikes as low as 30 attracted volume of some 2,775 lots in the March contract despite only about a 1% of Bear Stearns shares halving in value over the next 10 days."
Earlier Monday, the cost of insuring Bear Stearns' debt surged, a sign that some investors perceived an increase in the chances that the company may be facing liquidity issues.
The cost to insure Bear Stearns' debt with credit default swaps jumped as high as 650 basis points, or $650,000 per year for five years to insure $10 million in debt, before pulling back to 605 basis points, according to Reuters, who quoted broker Phoenix Partners Group. The swaps had traded at 465 basis points on Friday.
Bear Stearns shares appeared to be under pressure from talk about liquidity issues at the company as well as from a downgrade it received from Moody's Investors' Services.
Moody's reduced the rating on 163 tranches from 15 deals issued by Bear Stearns ALT-A Trust, with 78 downgraded tranches remaining on review for possible further downgrades.
Moody's said the downgrades are based on "higher-than-anticipated rates of delinquency, foreclosure and [repossessed foreclosures] in the underlying collateral relative to credit enhancement levels."
Also weighing on Bear Stearns' stock were negative comments on brokers from Bernstein Research, which said it would not recommend buying broker stocks at this time as they are still susceptible to further book value reduction.