Bear Stearns Short Subprime to Tune of $1 Billion

Bloomberg reports that Bear Stearns increased its short subprime position from $600 million in November to $1 billion. The story suggests that this hedge is to offset trading positions; there is no indication that the firm is “net short” as Goldman is.

For those who might think there is something wrong with this strategy, consider: the firm was one of the biggest issuers and managers of subprime paper. One of the expectations of a manager is that it makes a market in the offerings it sold. That obligation necessitates that a firms hold trading positions; what Bear seems to be doing is to use hedges to reduce its inventory exposure. Bear also said it had reduced subprime and CDO long positions.

From Bloomberg:

Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, has more than $1 billion of trades that profit if subprime home loans and bonds continue to deteriorate.

The “short” positions on subprime mortgage securities increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.

The sinking value of assets tied to mortgages led to Bear Stearns’s fourth-quarter loss of $854 million, and Molinaro said today that one of the firm’s biggest mistakes was “not being conservative enough and bearish enough on the subprime market.” The firm has reversed “long” subprime trades that stood at $1 billion at the end of August, Molinaro said.

“There’s definitely a lot of short plays out there,” said Mark Adelson, a founding member of Adelson & Jacob Consulting in Long Island City, New York. Some subprime bonds “could easily be bad enough that they don’t pay off a penny,” said Adelson, a former Nomura Holdings Inc. mortgage analyst.

In an interview after Molinaro’s remarks, Bear Stearns spokesman Russell Sherman said the New York-based firm’s subprime trades are a “hedge” against potential losses on investments in higher-rated mortgages, he said.

“We are using short positions to offset other long positions in our mortgage inventory,” he said. He didn’t provide details on specific trades.

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  1. Anonymous

    What ever happened to accountability??

    Sarbanes-Oxley mandates personal accountability for CFOs and CEOs. Their signatures on the appropriate documents accomplish the accountability. In other cases, the regulations are more obtuse.
    Many of the articles on SOX focus on the requirement for CEO and CFO sign-off. Though critical, this is really the tip of the iceberg. The requirements behind these regulations reach into all aspects of the corporation. For both SOX and Basel II, their focus is to greatly improve transparency, governance, accuracy, accountability and integrity of financial accounting and reporting.

    Penalties for Accounting Restatement If a company
    issues an accounting restatement as a result of
    noncompliance with financial reporting
    requirements, the CEO and CFO must refund all
    incentive-based compensation such as bonuses
    and options received during the 12-month period
    following the incorrect financial statement.

  2. Anonymous

    It’s unbelievable how much money these charlatan carpetbagging thieves make even when failing to exhibit leadership in almost every way possible. And you people in Manhattan allow it to go on. Grasso is just one example of getting overpaid for doing what you’re supposed to do. It makes no sense at all to give out huge bonuses for FAILURE but the BOD start to behave just like our legislature, they are paid hacks of the CEOs because they are all sharing seats.

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