Bear Stearns Cos. said Thursday its profit plunged 62 percent in the third quarter as turbulence in the debt market and wrong-way bets on mortgages crunched the investment bank’s credit portfolio and bond business.
The Wall Street brokerage reported third-quarter income, after paying preferred dividends, of $166.1 million, or $1.16 per share, compared with a profit of $432.2 million, or $3.02 per share, in the third quarter of 2006.
Analysts polled by Thomson Financial forecast a profit of $1.78 per share.
As the investment bank with the most exposure to mortgages, Bear Stearns was particularly vulnerable to the crisis in the U.S. credit markets this summer. Revenue from the bank’s fixed-income business, which sells products like bonds, fell 88 percent to $117.6 million.
This segment was by far Bear’s biggest breadwinner last year, contributing almost 45 percent of the company’s revenue in the third quarter of 2006. In this year’s third quarter, fixed income contributed less than 10 percent of total revenue.
“Bear’s core strength had been in these securities that went bad, and no one wants to deal in this stuff right now,” said Axel Merk, manager of the Merk Hard Currency Fund.
The company gave little insight into how a unit that booked $945 million in last year’s third quarter tumbled so dramatically. Bear said the fixed income segment collected less from its mortgage business, while the value of its portfolio declined.
This was Bear’s worst quarter since 2000.
Stung by decaying credit quality, investors this summer embarked on a flight from risky debt. Demand for many of the investment banks’ best-selling products suddenly drained, and the businesses they established to sell and trade these products lost value.
Bear Stearns Chief Executive James E. Cayne in a statement cited “extremely difficult” conditions for markets where investors buy pools of loans.
Bear’s Wall Street rivals — Morgan Stanley, Lehman Brothers Holdings Inc. and Goldman Sachs — recorded accounting charges ranging from $700 million to about $1.5 billion to account for the effect of the mortgage tumult on their business. Bear did not disclose the size of the hit its investment portfolio took.
One of the highest-profile casualties of the mortgage fallout was a pair of hedge funds managed by Bear Stearns designed to bet on mortgage debt. These funds went bankrupt this summer, which Bear Stearns said ate $200 million out of the company’s profit for the third quarter.