Wall Street investment bank Bear Stearns (BSC) reported Thursday a Q4 loss of $6.90/share, widely missing analyst estimates of -$1.79/share, after a larger-than-expected $1.9B writedown on mortgage-related assets reduced EPS by $8.21. Post-writedown revenue of -$379M was out of line with estimates of +$625 million. In early November Bear said it anticipated writedowns of approximately $1.2 billion on mortgage inventory net of hedges; as was the case with rival Morgan Stanley (MS) Wednesday (Morgan Stanley Gets $5B Cash Infusion After Huge Q4 Loss), the company underestimated, by $0.7B. "The continued re-pricing of credit risk and the severe dislocation in the structured products market led to illiquidity in the fixed income 
markets, lower levels of client activity across the fixed income sector and a snificant revaluation of mortgage inventory," it said. Bear said members of the executive committee will not receive any bonuses for 2007. "We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses," CEO James Cayne said (full earnings call transcript later today).
By unit, clearing services revenue grew 2% to $271 million; wealth management revenue gained 10% to $247 million; and capital markets revenue took a $956M loss, reversing a $1.9B gain a year ago.
Bond shops (number-two U.S. mortgage bond underwriter) like Bear could benefit from a potential U.S. recession, Sanford Bernstein's Brad Hintz noted. During a recession, traditional investment banking activities like acquisitions falter, while interest rate cuts often boost the price of bonds.
On Wednesday, U.K. bank Barclays (BCS) filed a suit suing Bear Stearns, saying it misled them regarding the performance of the Bear's highly-leveraged hedge funds. The two funds, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, collapsed in July, decimating $1.6 billion in investor capital. Barclays was a big lender to the enhanced fund. On Tuesday, CNBC reported Bear Stearns' board is looking at replacing Cayne amid accusations of weak leadership (Bear Stearns CEO Cayne May Step Aside). Shares are up 1.5% to $91.97 in pre-market trading.
Additional Reading: Banks, Brokers and Bull • Covered Bear and Lehman Shorts
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