Earnings fall 61% at Bear Stearns

The Baltimore Sun

NEW YORK -- Bear Stearns Cos., rocked by the collapse of two hedge funds in the subprime mortgage crisis, said yesterday that its third-quarter profit plunged 61 percent, hitting the lowest level in five years and topping off a painful summer for the Wall Street brokerage.

Bear's bearish news stood in sharp contrast to a superlative performance by Goldman Sachs Group Inc., which posted a 79 percent rise in fiscal third-quarter profit, led by strong results in its investment banking, currency and commodities divisions.

It was one of Goldman's most profitable quarters ever, and the starkly different earnings reports left some analysts impressed by the firm's ability to outmaneuver the credit market turmoil that snared Bear.

"The reason why Goldman has outperformed, and is going to continue to outperform, is it happens to have dominant market share in the areas of business where you want to be - emerging markets, global mergers and acquisitions and commodities," said Meredith A. Whitney, an analyst with CIBC World Markets, who has recommended buying the firm's stock. "It not only had that dominance; it outperformed in all those areas."

Bear's profits were brought down by diminished fixed-income revenue coupled with a $200 million loss from its June hedge fund failures. Bear posted net income for the quarter of $171.3 million, or $1.16 a share, down from $438 million, or $3.02 a share, in the fiscal third quarter last year.

Net revenue for the firm, or total revenue minus interest costs, fell 37 percent to $1.33 billion, while net revenue at the fixed-income division dropped 88 percent, to $118 million from $945 million in the third quarter of 2006. Return on equity stood at 5.3 percent, compared with 16 percent a year earlier.

Some analysts are predicting layoffs and restructuring for Bear in the months ahead.

Bear Stearns' chief executive, James E. Cayne, who ousted one of his top lieutenants last month after the summer's problems, acknowledged in a statement that the firm's third quarter "was characterized by extremely difficult securitization markets and high volatility levels across asset classes."

But pointing to increased revenue in the firm's global equities and investment banking divisions, Cayne added, "I am confident in the underlying strength of our business and proud of the effort and determination displayed by our employees during these challenging times."

Bear Stearns was the hardest hit of the major brokerages after this summer's subprime crisis, which forced Morgan Stanley and Lehman Brothers Holdings Inc., which reported third-quarter results earlier this week, to write down hundreds of millions of dollars in loans.

Goldman's net income was $2.85 billion, or $6.13 a share, up from $1.59 billion, or $3.26 a share, in the period a year earlier, beating analysts' expectations. Its return on equity increased to 36.6 percent from 31.6 percent.

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