August 6, 2007

Spector Leaves Bear Stearns

Subprime rocks management boat

Bear Stearns announced on Sunday, August 5, management changes that include the resignation of an Executive Committee and Board of Directors Member, Warren Spector, who was president and co-COO of Bear Stearns Companies Inc.

The restructuring follows a turbulent period for the firm, during which it earmarked $1.6 billion to bail out two Bear Stearns-managed hedge funds--Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. The two hedge funds filed for Chapter 15 bankruptcy protection on July 31, and investors filed arbitration suits on August 1, according to two reports by Associated Press. On July 17, Bear Stearns told clients of the two funds, which reportedly invested in subprime loans, that the Enhanced Leverage Master Fund, which had been worth $638 million in March, had "no value," and the Structured Credit Strategies fund, worth $925 million in March, had "lost 91% of its value," according to AP.

Standard & Poor's announced August 3 that it had "revised its outlook on Bear Stearns Cos. Inc. to negative, from stable," but "affirmed its 'A+/A-1' issuer credit rating on Bear Stearns as well as its ratings on various Bear Stearns affiliates." S&P cited "material exposure to holdings of mortgages and MBS, the valuations of which remain under severe pressure," and "debt it has taken up as a result of unsuccessful leveraged finance underwritings, and it has significant further underwriting commitments." S&P says in the announcement that it believes that the firm's "direct balance-sheet exposures are not proportionately larger than those of Bear Stearns' peers." S&P states that it expects "Bear Stearns to be profitable in the current quarter," but adds, "Bear Stearns has a relatively high degree of reliance on the U.S. mortgage and leveraged finance sectors, and its revenues and profitability would be especially affected if there were an extended downturn in those markets."

Bear Stearns held a conference call on August 3, to respond to S&P's change in outlook, and in a release on its Web site, Chairman and CEO, James Cayne says, "Contrary to rumors in the marketplace, our franchise is profitable and healthy and our balance sheet is strong and liquid. Bear Stearns has thrived throughout both tumultuous and fortuitous markets for the past 84 years. We are experiencing another market cycle and we are confident in Bear Stearns' ability to succeed in this environment as it has in so many others."

All of these events preceded the management changes that Bear Stearns announced on Sunday, which in addition to Spector's resignation include the appointment of an individual president, Alan Schwartz, who had been president and co-COO with Spector. Samuel Molinaro, Jr., the current CFO, will add to that the COO title and duties. Fixed Income Division co-head Jeffrey Mayer has been added to the Bear Stearns Executive Committee.

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