NEW YORK (Reuters) - Bear Stearns Cos BSC.N, whose shares plunged earlier on Tuesday, pared its losses after regulators said they were comfortable with capital levels at the largest U.S. investment banks, including Bear, and a company insider denied the company was facing a cash crunch.
Bear Stearns shares closed up 1.08 percent at $62.97. The shares had fallen as much as 11 percent earlier in the day, extending an 11 percent drop on Monday, on concerns the investment bank could face a cash crunch from bigger-than-expected write-downs, and could be hampered by a business model based on risky mortgage securities.
Bear Stearns, the fifth-largest U.S. investment bank, said on Monday that its balance sheet, liquidity and capital remained strong.
U.S. Securities and Exchange Chairman Christopher Cox told reporters on Tuesday that capital adequacy at the five largest U.S. investment banks was being closely watched.
“We are reviewing the adequacy of capital at the holding company level on a constant basis, daily in some cases,” Cox said.
“We have a good deal of comfort about the capital cushions at these firms at the moment,” he said, including Bear.
The stock’s downward path early on Tuesday was in contrast to wider market activity on Tuesday. Financial shares led U.S. stocks higher after the Federal Reserve said it may increase the size of its latest $200 billion lending facility to boost financial market operations.
On Tuesday, Deutsche Bank cut its price target to $72 from $90 for Bear Stearns shares, and lowered its earnings estimates for fiscal 2008 and 2009, saying it thinks write-downs are likely to be worse than expected and fundamentals will weaken somewhat.
“Given Bear’s higher exposure to the softening mortgage market and less diversification by product and region than peers, we believe Bear should trade at a discount to its 5-year average multiples,” analyst Mike Mayo wrote in an investor note.
A Bear Stearns insider, who asked not to be identified, said on Tuesday there was no truth to market speculation that Bear faced a cash crunch.
A Bear Stearns official declined to comment.
Punk Ziegel & Co analyst Richard Bove said the primary concern was Bear being forced to build a new business model.
“Bear Stearns’ key strength in the old cycle was capturing the revenue growth in the mortgage markets,” Bove wrote in a note.
“The business is now unlikely to show any growth for five years,” he said. “The profits are also likely to be squeezed out as the more esoteric securities are rejected by the markets.”
Punk Ziegel cut its price target for Bear to $45 from $67. It also lowered its earnings estimates to $2.69 a share from $6.47 for fiscal 2008 and to $4.80 from $7.67 for fiscal 2009.
Even after paring losses, Bear Stearns shares closed on Tuesday just off a five-year low, and are trading at about half the value the shares fetched five months ago.
The share decline has sent Bear back to the table with a Chinese government agency that last October agreed to take a significant stake, and has shrunk the value of a large stake that British billionaire Joseph Lewis started building in the investment bank last September.
China’s Citic Securities 6000030.SS and Bear had agreed to each invest $1 billion in the other and also to form a joint Asian banking venture.
Last week, Bear said it was in talks with Citic to renegotiate the terms of their October agreement, reflecting deterioration in shares of both companies.
Lewis, one of Bear’s largest shareholders with a roughly 9.6 percent stake, could not be reached for comment on the declining value of his stake.
An executive at Tavistock Group, an investment firm he controls, was also not available for comment.
Lewis, who made his fortune trading currencies, paid about $1.19 billion for his stake in Bear, according to a December U.S. regulatory filing. That stake would today be worth about 40 percent less, or roughly $711.5 million.
Additional reporting by Joseph Giannone and Rachelle Younglai; Editing by Lisa Von Ahn