Bear gloom drags markets down
By David Wighton in New York and Paul J Davies in London
Copyright The Financial Times Limited 2007
Published: August 3 2007 18:47 | Last updated: August 4 2007 01:02
US stocks plunged in late trading on Friday as credit concerns mounted and the chief financial officer of Bear Stearns said fixed-income markets were “as bad as I’ve seen in 22 years”.
Markets were hit early on when Standard & Poor’s said there was an increased chance of it downgrading Bear’s credit rating. Bear responded with a conference call for investors, during which Jimmy Cayne, chief executive, said all financial institutions were facing “an extremely challenging environment”.
The call did nothing to calm nerves and the S&P 500 index closed 2.7 per cent off. The yield on the two-year US Treasury fell 15 basis points to 4.43 per cent, the lowest since January last year, as futures markets priced in a strong chance of two cuts in the Fed Funds rate this year.
David Wighton explains why Standard & Poor’s has given Bear Stearns’ debt rating a negative outlook
The cost of insuring against default on the debt of Wall Street banks rose sharply, with Bear Stearns trading at a level higher than the average for junk bonds.
S&P said Bear had a relatively high reliance on both the troubled mortgage and leveraged finance sectors and “profitability would be especially affected if there were an extended downturn in these markets”. It was also concerned on the impact on Bear’s reputation of the collapse of two mortgage hedge funds it managed.
This week saw increased signs of pain in the US mortgage market while it emerged on Friday that banks had for the moment abandoned attempts to sell to investors $1bn (£490m) of debt for the leveraged buy-out of Alliance Boots, the pharmacy chain.
Sam Molinaro, Bear’s chief financial officer, said it had been profitable in June and July and that it had a strong and highly liquid balance sheet. He also pointed out that Moody’s had recently reaffirmed its credit rating.
Credit ratings are particularly important for broker dealers such as Bear Stearns, which depend on the capital markets to fund their balance sheets.
The threat of downgrades are likely to increase speculation that Mr Cayne, who did not stay on the conference call to answer questions, might consider selling the company.
Bear shares fell more than 6 per cent while Lehman Brothers were off nearly 8 per cent.