Can a wounded Bear survive?

Mar.15, 2008 in Market Outlook

“A company is only as solvent as the perception of its solvency,” Oppenheimer analyst Meredith Whitney wrote in a note Friday. “When a company that is leveraged over 30 to 1 faces a crisis of liquidity and confidence of creditworthiness, that company will be unable to leverage its collateral and its leverage will be forced down to 1 to 1.”

Investors are voting with their brokerage accounts, pushing shares of Bear down $21.75, or 39%, to $35.25 on volume of more than 146 million shares.

On a conference call Friday, Bear Stearns executives revealed that they have had, and would continue to have, talks with their investment bankers, Lazard Ltd., about their “alternatives” — a Wall Street euphemism that often means putting up a company or part of it for sale.

That could be a problem for Bear’s equity position, according to Whitney. “BSC’s equity could become worthless as forced sales create asset deflation, which could cause cannibalization of remaining capital.”

No matter what Bear does next, investors should not count on the bailout as a cure-all solution.

“The liquidity facility is a temporary solution, and the ultimate outcome is likely to be a sale of the entire company within a relatively short time frame,” David Hendler, an analyst at CreditSights, wrote in a note to investors.

The brokerage firm’s fall from grace may be a drawn out process, some analysts said.

“They shoot horses, don’t they? Instead of shooting this nag, they are dragging [Bear] behind the truck while everyone lines up and kicks it!” Wall Street pundit and analyst Jon Najarian wrote to clients Friday.

Other market watchers disagreed that Bear is necessarily doomed to fail. “I think it’s pretty clear that they will survive, but survive at half their current size,” Punk Ziegel analyst Dick Bove told MarketWatch. He said that the Federal Reserve’s intervention will help stabilize the company and make sure it does not upset the markets anymore than it has.

The company would then go into a period of liquidation over the next year, Bove said, during which it will offload people and divisions until it gets back to a “manageable level.”

“But it will take a minimum of five years to get it back to where it was before this all happened,” he said.

Analysts commented that Bear Stearns would probably be most affected by clients jumping ship on worries that the firm could no longer survive.

“The recent news may have a negative effect on its future earnings, as clients may shift their business due to concerns of its future viability,” said BMO Capital Markets analyst George Lazarevski.

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