Bear Scare Rattles Wall Street
Aug 03 2007
Bear Stearns can't seem to catch a break. And the broad stock market is suffering for it.
Standard and Poor's today lowered its outlook for the investment bank, which has recently seen two of its hedge funds collapse and a third enter troubled territory. Bear Stearns stock fell nearly 5 percent on the news, and fed pessimism on Wall Street.
Stocks fell sharply after the downgrade, which came atop an unexpectedly weak report on the jobs market. Economists had said that consumers' comfort in the labor outlook was encouraging them to keep spending, and thus buoying the overall economy.
The Dow Jones industrial average shed more than 280 points—more than 2 full percentage points—starting about 2 p.m., when Bear Stearns began a conference call with analysts to discuss its credit rating. The Nasdaq Composite Index and the Standard & Poor's 500 index were down even more: In excess of 2.5 percent. And the pace of decline was accelerating as the afternoon wore on.
On the conference call, Bear Stearns said it was profitable in both June and July, and has a solid balance sheet. But it also said this was the worst credit market environment in more than two decades, and added that it would suspend a share-buyback program to preserve its liquidity. That spooked traders.
While Bear's credit rating has been cut from stable to negative because of concerns that the falling price of mortgage-backed securities will hurt its earnings, the ratings on its debt remain unchanged, for now.
The change in outlook means there is a greater chance the rating on the debt will be lowered in the next two years. S&P said today that if Bear incurs large losses in upcoming quarters, its debt will be reduced from the A-plus rating it now holds.
The ratings agency also indicated that the bank does have enough cash to meet its near-term obligations.
As a result of S&P's prediction, the cost to insure Bear Stearns' debt increased.
Related links:
- MarketWatch: Another Staggering Sell-Off
- Bloomberg: Bear Stearns Rating Outlook Cut on Mortgage Concern
- Felix Salmon: Why Bear Stearns Might Be Sold
