Analyzing Bear Stearns's Credit Portfolio

Bullish noises from Citigroup analyst Prashant Bhatia this morning, via DealJournal's Dana Cimilluca: apparently Bear Stearns is going to have to end up owning "only" $9 billion of the debt it's underwritten in LBOs announced but not yet paid for.

Bhatia estimates a reduction in earnings per share this year of 2% to 5% for the five firms. If the analysis is on the mark, the securities firms’ stocks may have been oversold. Each has fallen 7% (Merrill) to 16% (Bear) in the past month.

Roddy Boyd has the bearish view: it's not just about the LBO debt.

According to Bear's most recent quarterly filing, with a capital base of $13.3 billion, Bear has to support over $423 billion in assets - $200 billion of which is securities and so-called mortgage- and asset- backed special purpose entities.

In other words, never mind the prospect that $423 billion in assets is going to become $432 billion in assets. That we can live with. The real problem is what happens when the $200 billion in credit-based securities gets marked down by, oh, 5%. Suddenly that's a loss of $10 billion, which all but wipes out Bear's equity. And at the same time, Bear's revenue stream – which was always very dependent on mortgages – is drying up to a trickle.

I find the bearish case more persuasive than the bullish, I must say. Which is probably a buy signal. When Salmon capitulates, you know we must be reaching bottom.