Fun with hedge funds: Bear Stearns update

It’s been a while since we’ve seen an investment bank melt down. Bear Stearns, I would assume, will be just fine, although you wouldn’t know it from how they’ve been acting the last few days.

Let’s go to the conference call transcript:

Jimmy Cayne, Chairman and CEO: I’m Jimmy Cayne. [Hi Jimmy!] I have asked for this conference call so that we can address the market situation and some of the specific concerns about the health of Bear Stearns [such as Standard & Poor’s just cutting its outlook on Bear Stearns’ debt to “negative” from “stable”].

Every financial institution, Bear Stearns included, is facing an extremely challenging market environment. I’ve been involved in the securities industry for more than four decades and I have seen a broad spectrum of market dislocations. In the stock market crash in the late ’80s, fixed income troubles in the mid ’90s, and the bursting of the Internet bubble in 2001, this is not the first time and certainly will not be the last time that Wall Street and the financial community will work through difficult conditions. [At this point — paragraph #2 of the call — investment bankers all over Wall Street were restarting their hearts with self-administered defibrillator jolts.]

I understand there is a great deal of uncertainty in the marketplace surrounding the operating environment and specifically, our firm. [Everyone thinks we’re going under.]

… Before I turn the call over to Sam, I want to assure you that we are taking this situation seriously. [Whew!]

Sam Molinaro, CFO: Okay, thanks, Jimmy. [Hi Sam!] I’d like to first report that our operating performance for the first two months of the quarter is solidly profitable. In fact, notwithstanding the extraordinarily difficult market conditions we’ve experienced over the past month, we expect July to also be profitable. [Invest in our now-collapsed hedge funds, did you? Sucker! Heads we win, tails you lose!]

… With respect to liquidity, our balance sheet, capital base and liquidity profile remained strong. [Always a good point to make when everyone thinks you’re about to go under.]

… In more volatile markets, our credit professionals are in frequent contact with [hedge fund] borrowers… [Of course, our folks have to hold their phones several inches away from their ears due to all the screaming.]

[Going to the interesting part — Q&A:]

Question: Can you walk us through how liquidity has disappeared so rapidly in pieces of the fixed income market? [How exactly did the world suddenly go to hell?]

Sam: Well, obviously there’s a great deal of uncertainty in the fixed income markets over the level of default and loss expectations in the subprime mortgage market [people with bad credit records aren’t paying their mortgages — who would have guessed?] and I guess generally in the broader mortgage market [always good to see your CFO being precise]. That, of course, is backing up into the CDO [mortgages bundled up into securities and sold to hedge funds and investment banks] market and basically risk premiums are being priced back into the marketplace [investors are back to expecting to get paid more for debt that might not be paid off — who would have guessed?].

So with a great deal of uncertainty, we’ve seen volumes dry up pretty dramatically [lots of sellers, no buyers] in the securitized product area [financial instruments representing various forms of credit]…

I think that we’ve been in a period of gridlock for quite some time. And it seems that with each new day and with each new month there’s new information in the mortgage market in terms of delinquencies and defaults. I guess every day has got new information. [Lottttttttttta guessing going on!]

Question: Hey, Sam. The opening comments mentioned the 80’s stock market crash, the burst of the tech bubble and you keep referring to weathering the storm. Do we compare what you’re going through now with those other more significant times?

Sam: I don’t know if you would consider them to be more significant or not. I think these times are pretty significant in the fixed-income markets. I’ve been at this for 22 years. It’s about as bad as I have seen it in the fixed-income market during that period of time. So yes, I would say that these are — this market environment we have been seeing over the last eight weeks have been pretty extreme. And yes, we would make that comparison. I think it is a reasonable comparison. [At this point in the call, lights dimmed all over Wall Street due to a second, much larger surge of self-administered defibrillator zaps.]

Question: And can you size your exposure? You’ve mentioned mortgages, asset-backed, (technical difficulty) loans, CDOs, CLOs, you take that group of issues, what percent of your revenues would that comprise?

Sam: I don’t even know what that number is to be honest with you off the top of my head… [Uh oh.]

Question: In the asset management business with respect to any reputational fallout from the two [Bear Stearns] hedge funds [that collapsed and lost investors practically all their money], have you been seeing redemptions across other [Bear Stearns] funds that we should think about?

Sam: Obviously, we’ve seen redemptions in the other asset-backed securities [hedge] fund we have. [Yes, I bet.] I’m sure there will be redemptions across several of the other funds. It has not been a tidal wave by any stretch but again, we are in the — still early in this process.

Question: Are you presently noticing any reputational issues spreading beyond [Bear Stearns Asset Management — the division that contains the Bear Stearns hedge funds that blew up and lost their investors practically all their money] say into a private client or maybe clients potentially lost money or any other parts of your business?

Sam: Well, obviously people that lost money in the funds, you know that’s difficult and we’re having to deal with that. But I would say more broadly than that we’re not seeing any material reputational issues. [I’m guessing that Sam doesn’t run Marketing.]

I wish them all the best, and assume everything is going to be just fine, but man, am I glad I don’t own any Bear Stearns stock right now.

[Sunday update: Bear Stearns announced this weekend that it has fired its co-president, Warren Spector, who was responsible for the hedge fund division as well as “trading, equities, fixed income, energy and asset management”.]