NEW YORK — Facing a less-lucrative operating environment in the wake of this summer's credit crunch, Bear Stearns Cos. executives said Thursday that they will look to slice expenses and would entertain the notion of partnerships with outside firms or investors.
Executives at the beleaguered Wall Street firm, whose third-quarter earnings were hammered by the recent market turbulence, said during a half-day presentation to analysts and investors that the business climate is improving and expressed measured optimism that Bear will bounce back.
But the firm isn't expecting a return to the go-go conditions that prevailed earlier this year. Instead, Chief Financial Officer Sam Molinaro said Bear is preparing for a lower-revenue environment as volumes in businesses such as leveraged finance drop off. Jeff Mayer, Bear's co-head of fixed income, predicted that debt financing volumes will eventually fall to the levels of 2004 and 2005 - roughly 30% below their more recent levels.
"We are prepared to pull costs out as we need to," said Molinaro, who mentioned the possibility of paring back compensation expenses and possibly reducing the firm's headcount. "We are prepared to rightsize the business."
If Bear does move to cut expenses through layoffs, it probably won't be alone. Other Wall Street firms are trying to gauge whether the evaporation of various types of lending and credit trading is a permanent or temporary phenomenon. People at banks such as Citigroup Inc. and JPMorgan Chase & Co. expect to see at least some job cuts to account for the dramatically lower business levels.
Bear was hit especially hard this summer, after the collapse of two internal hedge funds that had bet on subprime mortgages set off a wider credit crunch. The bank's shares plunged from $140 each at the beginning of July to a trough of about $103 in mid-August. Since then, the shares have recouped some losses and recently traded for $126.86, down 1.1% on the day.
That swoon has prompted speculation that Bear may turn to an outside investor for financial aid to help shore up its operations and restore confidence among clients and investors. The bank, a leader in mortgage securities, has been hit harder than its larger competitors, because its business lines aren't as diverse and it has a much smaller presence overseas - gaps an outsider could help bridge.
The New York Times reported last month that Bear was in talks with Warren Buffett and financial institutions in China about a possible equity investment. Chief Executive James Cayne said Thursday the firm isn't searching for an outside investor, but did say Bear would be willing to talk to parties that are interested in buying a slice of the company.
"If something comes along where a potential partner or someone brings geographic or strategic value to us...we would certainly look at that," Cayne said.
Overall, though, Bear executives tried to convey what they described as a cautiously optimistic tone at the investor and analyst meeting.
"Most of our businesses are beginning to rebound," Cayne said.
Schwartz described the market as being in the "very early stages" of a recovery, thanks in part to the Federal Reserve last month cutting short-term interest rates by 50 basis points. The executives noted that Bear and its peers are chipping away at the massive $300 billion debt backlog, recently managing to sell a chunk of debt to finance the leveraged buyout of First Data Corp. (FDC). Meanwhile, trading and underwriting volumes are showing signs of accelerating.
"We think the distress that we experienced during the summer is largely behind us and now we can just work through this inventory," Mayer said.
Mayer said the debt backlog is likely to ease within three to six months, at which point Bear and others will be in a position to start looking at financing fresh commitments. But he said the era of the $10 billion megadeal is likely over, at least for the foreseeable future.
Bear executives also moved to ease concerns about risk levels in its asset-management division, which saw two hedge funds implode this summer, helping ignite the global credit scare. The unit's new CEO, Jeff Lane, said the company beefed up its risk-management practices and is continuing to improve its capabilities.
The hedge fund debacles prompted some of Bear's hedge fund clients to pull their business from the company's prime brokerage operation. Now Bear is trying to lure them back. Molinaro said the company is "in active dialogue with all of them about recapturing business."
