US: Credit Market

Bear Stearns Shares Claw Their Way Back

CNBC with Wires

Shares of Bear Stearns clawed their way back to close Tuesday with a modest gain after an earlier rout spurred by concerns that the investment bank faces bigger-than-expected write-downs and may find itself hampered by a business model based on risky mortgage securities.

Bear Stearns
Jin Lee

Bear shares eked out a 1.1 percent gain in heavy trading -- volume was five times the normal average -- after being down at one point by more than 11 percent.

The stock's sell-off was in stark contrast to the broader market trend: Financial shares led the market rally after the Federal Reserve said it would add up to $200 billionto strained credit markets as part of a coordinated effort with other central banks.

"Positive market moves are fueled by two things -- confidence and liquidity -- and the Fed gave us both today," Fred Froewiss, vice president for institutional sales at RF Lafferty, told CNBC. "I think what's holding the market back" from further gains "are the liquidity rumors over at Bear Stearns."

Alan "Ace" Greenberg, Bear's former CEO and its current executive committee chairman, told CNBC on Monday that speculation that the brokerage is facing liquidity problems are "totally ridiculous."

Bear Stearns officially declined to comment Tuesday, but a person inside Bear, who asked not to be identified, told Reuters, "There's no truth to the rumors in the marketplace."

Bear's second largest shareholder, Joseph Lewis, said Tuesday that he's not selling any shares. In fact, Lewis said he might even buy more.

And, Securities and Exchange Commission Chairman Christopher Cox said the SEC is comfortable with capital levels at the five largest U.S. investment banks, including No. 5 Bear Stearns.

More Bad News for Bear?

"We have a good deal of comfort about the capital cushions that these firms have been on," Cox told reporters after a news conference on greater cooperation with the Commodity Futures Trading Commission.

Still, "there's got to be something there," said Dave Rovelli, managing director of equity trading at brokerage Canaccord Adams. "Stocks don't lie."

Sanford Bernstein said there are more write-downs to come for brokerage firms and Citigroup estimated that banks will log write-downs totaling $9 billion during the first quarter.

Several traders told CNBC that the Federal Reserve's liquidity plan, which spurred Tuesday's rally, was a direct result of something at Bear Stearns.

Deutsche Bank cut its price target on Bear to $72 from $90, and lowered its earnings estimates for fiscal 2008 and 2009, saying it thinks write-downs are likely to be worse than expected and fundamentals will weaken somewhat.

"Given Bear's higher exposure to the softening mortgage market and less diversification by product and region than peers, we believe Bear should trade at a discount to its 5-year average multiples," analyst Mike Mayo said in an investor note.

Punk Ziegel slashed its target on Bear Stearns by half to $45 and drastically cut its 2008 and 2009 earnings outlook for the U.S. investment bank.

Without addressing specific rumors, Punk Ziegel analyst Dick Bove told CNBC that the brokerage firm's primary problem is that "the business model is broken."  Bear was vertically integrated in the mortgage business, Bove noted, and didn't get out soon enough, which dented its balance sheet.

"The key problem is not the write-offs and losses that the company must take in the just ended first fiscal quarter. The key issue is building a new business model," Bove wrote in a note to clients.

"The business is now unlikely to show any growth for five years," he said. "The profits are also likely to be squeezed out as the more esoteric securities are rejected by the markets."

"It may be that finding a merger partner is the best solution," Bove said.

Bove, who has a "market perform" rating on the stock, lowered his 2008 earnings view to $2.69 per share from $6.47. For 2009, the new estimate is $4.80 per share versus $7.67 earlier.