When the Bear Gets Weak Does It Leave Him Vunerable To a Possible Takeover?

Implications: James Cayne stepped down as CEO to pass the baton to Alan Schwartz, who believes Bear Stearns faces some risks and sits in a comfortable position, however, the new CEO may be downplaying the possibility of further write downs. In November 2007, Bear Stearns said it would write down approximately $1.2 billion of assets linked to mortgages. Bear Stearns was one of the first banks to signify trouble when it closed two hedge funds in June 2007, with losses of $1.6 billion. Barclays is suing Bear Stearns for allegedly misleading them over the performance of the two collapsed hedge funds that were used as collateral for a $400 million loan and now a third hedge fund will close after recording a loss of $300 million between August and November 2007. The fund will sell its remaining assets and return the proceeds over time. In 3Q07, Bear Stearns reported its first ever quarterly loss of $854 million due to subprime mortgage losses. Did the Bear ignore signs of trouble headed its way?

Analysis: James Cayne, now former CEO of Bear Stearns steps aside to let Alan Schwartz sit in the "hot seat." Cayne will remain in a non-executive role and serve on Bear Stearns Board. After risky investments in the subprime mortgage market which led to write downs and investors' losses in three of Bear's hedge funds, and a decline in share price, job cuts, and pending lawsuits, Cayne is added to the list of executives ousted after major write downs and losses in 2007.  

1.  Bear Stearns is still dependent on a stagnant mortgage market, which may not bode well for the Bear in 2008, as record defaults, foreclosures and home values plummet and the industry doesn't show any signs of recovery in the near future and it may be 2009 or later before the industry may rebound

2.  Alan Schwartz is known for his pragmatic style of management and Schwartz will have to confront the challenge of restoring morale at the battered firm as Bear weighs its future as an independent company, future legal woes and a possible sell or takeover of Bear Stearns. Schwartz will have free rein at the firm and may opt to sell Bear Stearns. Schwartz may also have to defuse the discontent growing amongst its shareholders who have watched Bear's shares plummet to a four year low

Takeaway:  The failure of Bear Stearns own oversight and risk management controls may have paved the way for three of its hedge funds collapsing, in addition to write downs, investors' discontent, pending lawsuits, U.S. investigations and Cayne having to step aside to allow Alan Schwartz to attempt to nurse the Bear back to help.