Is Bear Stearns Just the Beginning?

Wall Street wondering if more firms will collapse, despite Fed efforts.


March 17, 2008— -- With the collapse and then fire sale of Bear Stearns within the span of a few days, many on Wall Street are now looking around and asking, "Who might be next?"

Bear Stearns fell victim to what was essentially a bank run. Investors who feared that the 85-year-old firm was too deeply invested in bad mortgages cut off funding, crippling the firm.

Just a month ago, Bear's stock was trading at $80 a share. As news spread about the run on Friday, the bank's stock plunged, closing at $30 a share. And then — in what appears to be the final nail in the coffin — J. P. Morgan Chase announced plans over the weekend to buy the firm for a shockingly low $2 a share.

Bear was worth $20 billion in January and now — less than three months later — is being sold for less than $240 million.

So what about the other big Wall Street investment firms? Could we wake up tomorrow to suddenly find that another has become virtually worthless?

"It absolutely could happen to any one of these guys," said David Trone, a brokerage analyst at Fox Pitt Kelton. "There was a panic. If that degree of panic hit any of these guys, they're going down."

Trone said that while Bear Stearns showed some losses in the forth quarter of 2007 from the subprime mortgage market, it was doing a lot better during the start of this year.

"Bear was actually in a pretty good position," he said. "It was really no worse than other institutions that are standing today."

But starting on Thursday with a story in the Wall Street Journal, Trone said, new fears started to develop about Bear's access to cash and its ability to fund operations.

Fear set in, people started to sell as they erred on the side of caution and then "the self-fulfilling prophecy came true."

"A loss of confidence can't happen unless there is a grain of truth to the fundamental problem," Trone said. "The company had the flu, but it wasn't something it was supposed to die over. But the confidence broke."

This morning much of that speculation turned to Lehman Brothers, another well-known firm that is also heavily invested in subprime mortgages.

At the start of trading today, shares of Lehman plunged more than 36 percent. The stock rebounded a bit in the morning only to be down more than 48 percent by 2 p.m.

Driving down the stock price was news that Southeast Asia's largest bank instructed traders not to do business with Lehman. The bank, DBS Group Holdings Ltd., took back those instructions, but the damage was already done.

Further casting doubt on the health of Lehman Brothers was a move by ratings agency Moody's Investors Service, which affirmed its rating on the long-term debt of the bank but at the same time lowered it overall ratings outlook from "positive" to "stable."

That change means that Moody's is not as confident about the future for Lehman as it was last week.

Shares of all the other big financial firms were also down at midday. Goldman Sachs saw a 10 percent decline, Morgan Stanley was down 13 percent and Merrill Lynch fell 12 percent.

Lehman Brothers chairman and CEO Richard S. Fuld, Jr. said in a statement that moves over the weekend by the Federal Reserve to make more money available to the investment banks "from my perspective, takes the liquidity issue for the entire industry off the table."

"Our liquidity position has been and continues to be very strong," the statement said. "We consider the liquidity framework under which we have operated for almost a decade to be a competitive advantage."

Mark Zandi, chief economist and co-founder of Moody's Inc., said that the Fed is working on the issue "but I think this problem is bigger than them."

"They are going to continue to lower rates and provide liquidity but at the end of the day Congress and the administration are going to have to do more to stem the turmoil, Zandi told ABC News.

Zandi said that if the Fed did not step in when and how they did "the financial system would be in complete disarray."

Trone said that some of these rumors and the fear are being spread by hedge funds and other investors who have made investments — called shorts – that pay off if Lehman fails.

"There's no rational reason for Lehman to collapse, but there was no reason for Bear to go down," he said.

So what about the Bear Stearns name?

Cassidy Morgan, managing director of brand valuation for Interbrand, a brand consulting firm, said he thinks it will survive.

"The brand is likely to be worth more than what JP Morgan Chase paid for the entire organization," he said. "We believe that JP Morgan got a pretty good deal in the purchase of the brand."

Morgan said that while this sort of run has resulted in a loss of confidence in the bank, other firms have weathered worse storms and that — somehow — he expects the name to survive.

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